What to Know About Angel Investments

Angel investments are simply investments in your business, in exchange for equity or convertible debt, by individuals with the money to invest. Angel investors invest in seed, startup, and early-stage companies, typically focusing on those with significant growth potential.


What Are Angel Investors?

Angel investors are high net-worth individuals (or groups of individuals) that invest startup capital in new ventures in exchange for convertible debt or equity in the venture.

Also known as informal investors, private investors, and business angels, many company’s first angel investors come from the owner’s friends, family, and people that they know.

Many angel investors come from backgrounds as CEO or founders of startups of their own and often will join together with other angel investors in “angel groups” or “angel networks” to invest in new and young ventures. Because of this, angel investors and investor groups may be able to provide valuable guidance, advice, and network connections.

Types of Cash Flow

The Family and Friends Angel - Family and friends angels are those people you know personally. Many companies’ first angel investments come from family and friends. Oftentimes, these investments are based on your relationship, as these investors are making as much of a bet on you as they are your company.

The Super Angel - Super angels are investors that make a multitude of angel investments. While the super angel may be able to connect you to their vast networks, the nature of their many investments means that they will likely be less reliable for mentoring, guidance, or advice.

The Domain Angel - Domain angels are investors that are experts in one (or a small group of) domains. These angels are very familiar with your industry and space, and they see the value of your idea. Investments from domain angels provide legitimacy to your idea and your venture, and domain angels often provide access to their networks and valuable advice.

Angel Groups - Angel groups are groups of angel investors who regularly meet to discuss investment opportunities and decide on investments to make. Angel groups are commonly organized locally or regionally, often focusing on specific industries and domains.

How Does Angel Investment Work?

Although there is no standard angel investment process, most angel investment deals progress fairly similarly. For a company seeking angel investments, here is how that might look:

  1. Get on the Radar - The first step in securing angel investments is getting on angel investors’ radar and getting into their deal flow. Most angel investor deals happen through referrals, so you must connect with the right people and to the right networks to get into angel investors' deal flow.
  2. Screening - Prior to even hearing your pitch, angel investors are likely to screen you and your company. Angel investors want to make sure that the investment fits their investment and risk preferences.
  3. Pitch - If you make it through angel investors’ or an angel group’s screening, you will be called upon to provide more information such as a business plan or an investment deck and to pitch your venture.
  4. Due Diligence - Angel investors will then do their due diligence- conducting deeper research and confirming what you are telling them is true. They may evaluate your business strategy, confirm your financial position with creditors and debtors, and verify the information that you have provided and pitched.
  5. Negotiate the Terms of the Deal - If, at this point, the angel investor is still interested in investing, you must now negotiate the terms of the deal. These include the economic terms, ownership and control, governance and management, as well as liquidity and exit.
  6. Finalize the Documents - Next, the term sheet and legal documents will need to be prepared and finalized, with both parties agreeing to the concluding language and terms of the deal.
  7. Close the Deal - Finally, you will need to establish a closing process. The closing process includes signing the legal documents and the transfer of funds.

What Do Angel Investors Invest In?

Angel investors invest in seed, startup, and early-stage companies with significant opportunities for growth. Many of these opportunities are concentrated in:

  • Healthcare
  • Software
  • Retail
  • Biotechnology
  • Financial and Business
  • Industry and Energy sectors

When to Get Angel Investment

Angel investors typically invest in new and young companies. Seed, start-up, and early-stage companies can all seek investments as angel investors are traditionally known to heavily invest in seed and start-up stage ventures and early-stage companies, especially those with a high potential for growth. However, angel investors continue to make increasing investments in later-stage ventures.

How to Find Angel Investors

Network, network, network. Most angel investors source their deals through referrals, so in order to get access to angel investors, you will have to leverage the power of networking.

An easy place to start is online. The Angel Capital Association (ACA) offers a wealth of knowledge for angel investors and entrepreneurs alike. And, with over 14,000 angels and 250 angel groups, this is a great place to start your search for angel investors in your industry and area.

To increase your chances of finding angel investors, you should also join angel networks and groups. Networks such as AngelList, the Angel Investment Network, and Gust aim to connect entrepreneurs to the entire startup ecosystem and provide founders an opportunity to find and connect with angel investors.

Because many angel investors like to invest close to home, you can also find and connect with angel investors through your local startup community and events in your area. Join and network with your local business groups, startup communities, and the chamber of commerce. Attend trade fairs and events.

Finally, ask. Ask your family, friends, and people you know if they or someone they know might be interested in investing in your venture. Ask peers in your industry where they got their investments from. Ask business owners in your area if they know who is active in angel investments locally.

Pros and Cons of Angel Investments

There are several pros and cons of angel investments.

Advantages include:

  • It allows you to raise capital to leverage toward the company.
  • There is no monthly expense for repayment.
  • It may be easier to obtain through networking and from known investors than other types of equity financing.
  • Angels are everywhere, and tapping into angel investing networks may provide you an advantage.
  • Investors are often experts — able to provide valuable advice, guidance, and network connections.

Disadvantages include:

  • You’ll give up ownership and equity in the company.
  • You’ll give up some decision-making and control.
  • Angel investors expect a high rate of return to compensate for their risk.
  • It may create issues if you plan to raise venture capital in the future.

Angel Investments vs. Venture Capital

There are several key differences between angel investments and venture capital investments, including the stage at which each type of investment is appropriate, the sectors in which each is more likely to invest, the amount of investment sought, and the role of the investor(s) in your company.

  Angel Investments Venture Capital

Stage
Seed
Startup
Early Stage
Startup
Early Stage
Later Stage


Sectors
Healthcare
Software
Retail
Biotech
Financial/Business
Pharmaceuticals & Biotech
Healthcare
Commercial Services
Consumer Goods
IT Hardware
Investment Size $5,000 to $350,000+ $25M to $100M+

Role
Value, Guidance, Network
Often little control outside of equity
Value, Guidance, Network
May require a seat on the board or role in decision making

Angel Investors Frequently Asked Questions

Are angel investors a good idea?

There are several pros and cons of angel investments. While taking on angel investors dilutes the equity in your company and gives up some ownership, decision making, and control, it also allows you to raise capital to start and grow your business without saddling your company with ongoing payments on additional debt. Angel investors also may provide valuable advice, guidance, and network connections, adding to the value of angel investments.

How do I approach angel investors?

The best way to approach angel investors is through networking and personal introductions. Most professional angel investors source their deals through referrals. There are several platforms that allow you to find and network with angel investors, including the Angel Capital Association, AngelList, the Angel Investment Network, and Gust.

What do angel investors get in return?

Angel investors receive an equity stake in your company in exchange for their investments. Because angel investors invest in seed, startup, and early-stage companies, their investments are considered riskier than most investments, and they require a high rate of return to compensate for these risks. Most expect to hold this equity stake for five to seven years, although some angel investors may prefer to exit earlier or later than this window.

What percentage do angel investors want?

Angel investors often want a return of 20% to 25% (annually) on their investments. And, for earlier or riskier investments, they may want even more. How much equity they receive in the company depends on the size of their initial investment and the valuation of the company at the time they invest.

Can anyone be an angel investor?

Yes. Anyone with the funds can be an angel investor. Angel investments are simply investments in your business with the money to invest. In the case of angel investments, angel investors do typically invest between $10,000 and $100,000. However, you do not have to be an accredited investor to be an angel investor, although some angel groups and platforms may require you to be an accredited investor to join those groups.

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