angel-investor

Who Is An Angel Investor? The Top Angel Investors of Our Times

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.

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:

Fabrice Grinda

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.

Naval Ravikant

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. 

Paul Buchheit

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.

Esther Dyson

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.

Alexis Ohanian

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.

Key takeaways:

  • 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. 

Connected Concepts To Angel Investing

Venture Capital

venture-capital
A venture capitalist generally invests in companies and startups which are still in a stage where their business model needs to be proved viable, or they need resources to scale up. Thus, those companies present high risks, but the potential for exponential growth. Therefore, venture capitalists look for startups that can bring a high ROI and high valuation multiples.

Economic Moat

moat
Economic or market moats represent the long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.

Meme Investing

meme-investing
Meme stocks are securities that go viral online and attract the attention of the younger generation of retail investors. Meme investing, therefore, is a bottom-up, community-driven approach to investing that positions itself as the antonym to Wall Street investing. Also, meme investing often looks at attractive opportunities with lower liquidity that might be easier to overtake, thus enabling wide speculation, as “meme investors” often look for disproportionate short-term returns.

Payment for Order Flow

payment-for-order-flow
Payment for order flow consists of a “kickback” or commission that the broker routing customers to a market maker (in charge of enabling the bid and ask price) will pay a commission to the broker as a sort of market-making fee.

What is a SPAC

special-purpose-acquisition-company-spac
A special purpose acquisition company (SPAC) is a company with no commercial operations that are created to raise capital through an IPO to acquire another company. The SPAC is also called for that reason a “blank check company” as it will use the money provided by investors to enable private companies to go public via the SPAC.
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