Angel Investor
An angel investor is typically an accredited investor who invests in early-stage startups and other high-growth businesses.
OVERVIEW
An angel investor is a high net worth individual who provides capital for startups or early-stage businesses in the form of an investment. The capital can be a one-time investment or an ongoing investment strategy. Angel investors typically expect their investments to be short-term and have very high returns, making them suitable only for high growth companies.
If your business isn’t high growth you can finance it with a rollover from your retirement account, known as a ROBS. A ROBS is a great way to fund your startup without paying early withdrawal penalties or taxes. Check out Guidant, our recommended ROBS provider, for more information.
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Small Business Financing
What is an Angel Investor and How Do They Work?
Angel investors are people who invest in an early-stage company in exchange for an equity interest. Angel investors typically invest in a company pre-revenue or pre-profit, and the average angel investment is typically between $100k - $1 million. Usually, the angel investing process is easier than raising venture capital but more difficult than other startup financing options.
Specifically, an angel investor has 4 distinct qualities:
- They are individual or group of investors who are not friends or family.
- They typically invest between $100k and $1 million in a startup company.
- Their investments usually take place either pre-revenue or pre-profit.
- They usually try to exit an investment within 3 - 5 years.
Raising capital from angel investors can be a time-consuming process. You’ll first need to find investors who are interested in your business venture. From there, you’ll have to go through meetings, due diligence, negotiations, and more.
Generally, angel investors do not take part in the day-to-day operations of a business they invested in, which is unlike venture capitalists who typically have a board seat. However, business owners are expected to communicate with angel investors regarding company performance as well as let angel investors make suggestions on the business strategy.
Who Angel Investors Are Right For
Raising money from angel investors is a good option if your business meets 2 specific criteria. These criteria include the ability to find the right partner and a willingness to take on investors and their opinions. Let’s take a look at each of these 2 criteria in more detail.
1. Ability to Find the Right Partner
Unlike traditional business loans that require a borrower to prove creditworthiness, angel investors want to see a business’s potential for rapid growth and profitability. This depends as much on the ability of the business owner to find the right angel investor as it does his or her ability to sell the company’s vision.
2. Willingness to Take on an Investor
Angel investors who invest in your business will also become your “partners”. As partners, they’ll typically want to be included in the company’s planning process and require various updates and proprietary business information. Companies who don’t want this type of investor input should look elsewhere for startup financing.
What Angel Investors Look For in a Company
Normally, angel investors care about the quality, commitment, passion, and integrity of the founders themselves. However, they’ll also take into consideration the business’s market opportunity as well as the company’s growth potential. The following are the typical things that most angel investors look for in a company:
The following are the typical things that most angel investors look for in a company:
1. An Experience Team
Angel investors are more likely to invest in people rather than ideas. This is because many early-stage companies change their business plan over time. Angel investors want to work with people who are skillful, knowledgeable, and can be trusted. This helps ensure that their ideas align with that of the business owners’.
2. A Clearly-Defined Business Plan
Entrepreneurs need to have a clear and complete business plan and most angel investors want to see an evidence that the business is moving towards that plan. Almost all angel investors know that the plan will probably change over time. Still, having a strong initial direction is important for early-stage investors like angels.
3. An Appropriate Valuation
Angel investors want a business to negotiate an appropriate valuation with reasonable terms. There are a number of factors that affect valuation, such as the founder’s experience, the scope of the business opportunity, the desired investment amount, as well as any company revenues or profits.
What's more, entrepreneurs are expected to prepare the following during the first few meetings with an angel investor:
- A clearly articulated elevator pitch for the business, which includes a brief summary of a business.
- A prototype or working model of the product or service, which includes a demonstration working demonstrations.
- A defined market opportunity and a few early and active customers.
- An executive summary or pitch deck that is concise but also communicates the necessary information.
Ability to Repay Angel Investment
Angel investors expect a return of at least 260% or higher within a 3 - 5 year period. This means that a company needs to grow quickly and generate enough income to pay back the investors plus any profit distributions. If you or your business do not meet the above, angel investing may not be the best funding option for you.
Instead, you may want to check out other financing options for startups and see if you can find one that suits you better. For instance, you may use your retirement savings to fund a business through a Rollover for Business Startups (ROBS) or look into a Home Equity Line of Credit (HELOC).
Bottom Line
Angel investors are early-stage investors who look to invest in companies that are either pre-revenue or pre-profit. Angel investors are typically equity investors who expect a high return on their investment. Even though getting angel funding is technically not a business loan, working with an angel investor can be more stressful than working with a bank.
Guidant, is a Rollover for Business Startup (ROBS) provider that lets you finance your startup with your existing retirement savings. 81% of small businesses initially funded with a ROBS are still in business today.
The Details:
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Down Payment?
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Collateral
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Personal Guarantee?
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Have a question?
Pros
Angel investors are interested in small- to medium-sized companies.
Angel investors are willing to take risks.
An angel investment isn’t a loan and doesn’t require monthly payments.
Angel investors often have industry-specific knowledge that can help a company.
Cons
Angel investors might take control away from a business owner.
Angel investors usually have high expectations for growth and success.
Angel investors aren’t typically interested in first-time entrepreneurs.
How to Apply
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Additional Resources
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