An angel investor is an individual who offers financial support to entrepreneurs and start-ups. Angel investors usually have a high net worth and excess funds. Angel funds are usually given as one-time investments at the start to help a business take off or as a cash infusion in between to boost operations.
While regular investors invest only after finding out the viability of a business, angel investors invest in the person behind the business. Their main goal is to help the business grow and succeed rather than look at making a quick profit.
An angel investor is a person who invests money in exchange for a share of the company’s ownership. They can be friends and family of entrepreneurs or be completely unrelated to them. They are also known by other names such as seed investor, private investor or angel funder. In return for their financial backing, they are normally given a share of the ownership of the company. This arrangement also helps the company determine its financial worth in the market.
Angel investors – the origins
The Broadway theater was where the term ‘angel’ was first coined. Wealthy people who secretly gave financial aid to help theatrical productions were called angels. The term ‘Angel investor’ was first used by William Wetzel from the University of New Hampshire, founder of the Center for Venture Research.
Understanding angel investors
Angel investors are individuals who have excess funds and willingness to invest in those opportunities that will net them a higher rate of return than other regular investments. These investors look at financing businesses that are just starting up or in their early stages. However, as much as they are looking to invest in such opportunities, they are also aware that these investments are risky. Hence, angel investing normally forms only about 10% of their total investments.
Angel investors find various ways to give money to start-ups. While they are usually wealthy individuals who invest on their own, sometimes they take a few other options as well. Sometimes, they build their own angel investor networks through which they put money together and fund businesses. Others prefer investing through crowdfunding platforms.
The key difference between angel investors and regular investors is that while normal investors invest only after finding out the viability of a business, angel investors invest in the person behind the business. Their main goal is to help the business grow and succeed rather than look at making a quick profit for themselves. In essence, they are the opposite of venture capitalists.
How do angel investors fund businesses?
Usually, angel investors use their own money to fund businesses. This is the opposite of what venture capitalists do. Venture capitalists pool money from various investors and put it into a very carefully managed fund. Angel investors use their own money, but the funds are normally channeled through an investment fund, another business or an LLC.
An angel investor who invests in a business that fails too soon will lose their money. This is why they have their exit strategies clearly defined well before the money is given. The rate of return expected by angel investors can be higher than other sources of funds such as banks. But new businesses usually find it tough to get funds from banks. This is where angel investing seems like a good idea.
Can anyone be an angel investor?
Generally, most angel investors are people known to be investors by the public or in the industry. But this is not a mandatory qualification. According to the SEC (Securities and Exchange Commission), anyone with a net worth of at least $1 million in assets excluding personal residences or has earned an income of at least $200,000 in the past year as an individual or a combined total of at least $300,000 as a married couple qualifies to be an ‘accredited investor’. However, an accredited investor may not be an angel investor.
Angel investing is a lot more appealing than other forms of investment for entrepreneurs and start-up founders since they feel that other investment forms are more predatory in nature. Therefore, anyone who has sufficient wealth and the desire to see new businesses grow can become an angel investor.
