Here’s What You Need to Know about Angel Investors
Angel investors invest in startups and early-stage companies, acquiring a share in the company’s equity in exchange for their investment. Read on for more about the rise of angel investors and the role they play in providing companies with alternative funding opportunities.
Who are angel investors?
Angel investors are individuals who recognise potential in new startups and offer them the capital to establish or grow their business. They invest their own money and are usually qualified as accredited investors, meaning they have an annual income of $200,000 or a net worth of $1 million or more.
Angel investors usually invest during what is called the “seed round.” A typical angel investment at this point is somewhere between $25,000 and $100,000.
Often, angel investors concentrate on a specific industry, and they are usually established entrepreneurs and businesspeople in their own right.
Well-known angel investors include:
· Naval Ravikant
· Ross Blankenship
· Paul Graham
· Jeff Clavier
· Peter Thiel
· Fabrice Grinda
· Ron Conway
· Keith Rabois
· Chris Sacca
Since this form of investment is inherently risky, angel investors usually expect significant returns of 25% or more.
What are the five angel types?
1. Family and friends. In order for this kind of investment to work, it is vital that all parties enter the situation with their eyes wide open. Family investors typically have little insider knowledge to add to the business, but they may want a say in operations, which can create an awkward situation as the company grows.
2. Business friend. Sometimes referred to as the previous-colleague angel, this type of investor can vouch for the entrepreneur and validate their venture to future investors. Business friend investors can be very supportive, helping entrepreneurs access resources and employees to help the company grow, although they may not be able to add much value after the first financing rounds.
3. Once-removed. Here, the angel and entrepreneur are brought together through a mutual acquaintance. Since the angel does not know the entrepreneur, they may find the investment more attractive if there are other angel investors already on board.
4. Domain. This type of angel has specific knowledge of the venture’s industry. Domain investors are usually individuals who have spent their entire career in a particular field, acquiring expert, insider knowledge. They can serve as a great validator in attracting future investors, but they may also share unsolicited advice.
5. Super angel. Also called archangel investors, super angels come with a proven track record and a string of successful investments. Super angel investors form part of the wider venture capital community. They can add a great deal of value to an entrepreneur’s professional network, particularly in terms of raising venture capital. There is a downside to super angel investors, however. Because they usually spread their investments across several ventures, they often only have a limited amount of time to spend mentoring any one business.
How do entrepreneurs find angel investors?
A good place to start are personal and professional networks, where entrepreneurs and collaborators look to enlist family, friends, or once-removed angels. A business looking to bring in a super angel will need to carry out their own due diligence.
Websites like Crunchbase enable entrepreneurs to seek out angel investors, allowing them to filter by location, industry, and exit count. Rather than asking strangers for money straight away, a better approach is often to ask investors for feedback on the business concept.
What factors are most important to angel investors in deciding whether to invest?
There are five main criteria angel investors consider when deciding whether to invest in a new venture:
1. The founders. Do they have integrity? Are they committed and passionate about making the business a success?
2. Market opportunity. Is there sufficient demand? Is there much competition?
3. The business plan. Investors want to see a clear strategy for taking the business forward, as well as any early evidence of growth.
4. Technology or intellectual property. Are there patents and/or intellectual property rights? Does the business impinge on the rights of any third party?
5. An appropriate valuation. Potential investors will want to know exactly how the founders have arrived at their figures, along with any evidence in support.
Can angel investments turn sour?
There are all sorts of angel investors, from individuals with a high net worth to corporate professionals. It is important that both the angel and the entrepreneur are honest with each other from the outset to avoid confusion and potential acrimony at a later stage.
Angel investors need to be clear how much they can invest. If they want to exit early, this could potentially be an issue. Personal involvement can vary greatly from one angel to the next — if it is too little or too much, this can cause serious problems too.