An angel investor is usually a high-net-worth individual who finances start-up ventures, often with his own money.
Angel investing is often the primary source of finance for many startups who find it more attractive than other, more predatory forms of finance. The support provided by angel investors to start-up companies encourages innovation that translates into economic growth.
These types of investments are risky and generally represent no more than 10% of the angel investor portfolio.
What is an Angel Investor?
An angel investor (also known as a private investor, seed investor, or angel fundraiser) is a high-net-worth individual who provides financial support to small ventures or entrepreneurs, typically in exchange for ownership capital in the company. Angel investors are often found among an entrepreneur’s family and friends. Funds provided by angel investors can be a one-time investment to help get the business started, or an ongoing injection to support the company and move it through the tough early stages.
Angel investors are individuals who want to invest in the early stages of startups. Most angel investors have excess funds and seek a higher rate of return than traditional investment opportunities.
Angel investors provide more favorable terms than other lenders because they usually invest in the entrepreneur who started the business rather than the survival of the business. Angel investors are more focused on helping startups take their first steps, rather than the potential profit they can derive from the business. Essentially, angel investors are the opposite of venture capitalists.
Angel investors are also called informal investors, angel funders, private investors, seed investors or business angels. These are individuals who are normally wealthy and inject capital into new companies in exchange for ownership capital or convertible debt. Some angel investors invest through online crowdfunding platforms or set up angel investor networks to pool capital.
Origins of Angel Investors
The term “angel, angel” comes from the Broadway theater where wealthy people pay to advance theatrical productions. The term “angel investor” was first used by William Wetzel, founder of the Center for Enterprise Studies at the University of New Hampshire. Wetzel was used in a study of how entrepreneurs raise capital.
Who Can Be an Angel Investor?
Angel investors are normally individuals who have gained “accredited investor” status, but this is not a prerequisite. In the United States, the Securities and Exchange Commission (SEC) defines an “accredited investor” as a combined investor with net assets of $1 million or more (excluding private residences) or $200,000 in income in the previous two years. . Conversely, being an accredited investor is not synonymous with being an angel investor.
Essentially, these individuals have both finances and a desire to finance startups. This is welcomed by cash-hungry startups, who find angel investors far more attractive than other, more predatory forms of financing.
Financing
Angel investors often use their own money, unlike venture capitalists who deal with money raised from many other investors and place it in a strategically managed fund.
Although angel investors generally represent individuals, the entity that actually provides the funds can be a limited liability company (LLC), a business, a trust, or a mutual fund, among many other types of instruments.
Investment Profile
Angel investors who seed startups that fail in their early stages completely lose their investment. That’s why professional angel investors look for opportunities for a defined exit strategy, acquisitions or initial public offerings (IPOs).
For angel investors, the effective internal rate of return of a successful portfolio is approximately 22%. While this may sound good to investors and too expensive for entrepreneurs with early-stage businesses, cheaper sources of financing such as banks are often not available for such business ventures. This makes angel investments perfect for entrepreneurs who are still struggling financially in the startup phase of their business.
Angel investment has grown over the past few decades as the appeal of profitability has allowed it to become the primary source of finance for many start-ups. This, in turn, spurred innovation that translated into economic growth.
