An angel investor is usually a high net-worth individual who invests in early-stage start-ups in exchange for equity in the company. Angel investors are wealthy private investors focused on financing small business ventures in exchange for an equity stake. Unlike a venture capital firm, an angel investor invests their own capital during the early stages of a start-up when the risk of failure is relatively high, yet it might in the long-term unlock higher rates of return.
Understanding angel investors
Many angel investors have excess available funds and are looking for investment opportunities delivering a higher rate of return.
They tend to provide more favorable terms than other lenders because they invest in the person starting the business and not in the viability of the business itself.
Indeed, the angel investor may be a close friend or family member of the entrepreneur(s).
While the angel investor does want to make a profit, this outcome is secondary to helping the start-up transition through the difficult early stages of growth.
Essentially, they want to see the company survive long enough for a brilliant idea to come to fruition.
There are no formal requirements to becoming an angel investor, though many have gained accredited investor status from the Securities and Exchange Commission (SEC).
These are individuals with a net worth exceeding $1 million, excluding personal residences, with an income exceeding $200k for singles or $300k for married couples.
Why do entrepreneurs prefer angel investment funding?
To say that entrepreneurs require angel investment funding to keep the lights on would be too simplistic.
Many often require guidance on the most optimum way to spend the money to give the business the best chance of succeeding.
Entrepreneurs prefer to work with angel investors because they:
Offer wealth and knowledge
Angel investors have previous, first-hand experience of running successful enterprises.
Aside from their financial contribution, they mentor the entrepreneur to help them realize growth and higher rates of return.
Connect them with industry experts
Entrepreneurs can also gain access to the wide professional network of the angel investor.
These networks provide opportunities for further mentorship, but more importantly, can also provide the basis for subsequent rounds of investment funding.
Accept inherent risks
Most successful angel investments yield an internal rate of return (IRR) of 20-40% over a five to seven-year period.
While angel investing is inherently risky, angel investors seek to minimize risk by evaluating the idea against predetermined criteria.
These criteria may be based on industry knowledge, business model viability, the ability of the entrepreneur, and the time required to realize profit.
Angel investing vs venture capital
Angel investing is a form of venture capital.
However, in angel investing, the angel usually invests in a very early stage, where there is no business model yet, traction, and revenue.
This of course will depend on the kind of investments the angel gets into, yet in general, angel investors try to look for those entrepreneurs with high potential.
The angel investor knows that many of her/his bets will go to zero, yet if they turn to work out, they might turn into 1000x winning bets.
That is why the angel investor looks more like a sports scout, finding talents very early on, than traditional investors.
The most successful angel investors today
Who are the individuals at the forefront of angel investing today? We have compiled a list of five of the most prominent below:
A French angel investor based in New York City who prefers to invest in marketplaces connecting buyers with sellers.
Grinda and a panel of experts are known to analyze approximately 100 companies every week. Some of his notable investments include Flexport, Betterment, and Alibaba.
An Indian-American entrepreneur who began his angel investing journey with AngelList, a website connecting start-ups, angel investors, and job-seekers.
Ravikant has invested in such companies as Uber, Opendoor, Clubhouse, Twitter, and Stack Overflow.
An American computer engineer and entrepreneur who is best known for creating Gmail and the original prototype of Google Adsense.
Buchheit is a partner in investment firm Y Combinator and manages his own angel investments in the media, information technology, health, and enterprise software industries.
A Swiss-born American investor, journalist, author, commentator, and philanthropist.
Dyson is a leading angel investor in the space, biotechnology, government, and healthcare industries.
She was an early investor in Facebook, Flickr, Space Adventures, Omada Health MeetUp, and Square.
An Armenian-American entrepreneur, investor, activist, and author who is passionate about the open internet, STEM education, and paid family leave.
Ohanian is best known for co-founding Reddit and was also a former partner of Y Combinator.
Through his early-stage investment firm Initialized Capital, Ohanian manages investments worth more than $500 million in a portfolio with a market value of $36 billion.
- An angel investor is usually a high net-worth individual who invests in early-stage start-ups in exchange for equity in the company.
- In addition to investment funding, angel investors provide expert guidance on how that funding should be optimized. Entrepreneurs value angel investors for their industry knowledge, professional networks, and high-risk tolerance.
- Some of the notable angel investors today include Fabrice Grinda, Naval Ravikant, Paul Buchheit, Esther Dyson, and Alexis Ohanian.
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