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Angel Investors: A Deep Dive Into This Classic Form of Business Funding

Published By Janet Gershen-Siegel at December 20th, 2015

Angel investors can be your saving grace when you are looking for business funding. Sometimes they are willing to lend money when other banks and financial institutions simply won’t.

A Look at Angel Investors for Startups and More

Business Financing

Getting the working capital you need to grow your business doesn’t have to be too difficult. You may be trying to find business loans. But there’s another way.

Many companies these days turn to this form of financing. And these options can work for startup ventures. But there are details you should know.

What Are Angel Investors?

According to Investopedia, the angel investors definition is:

“… [They] invest in small startups or entrepreneurs. Often, angel investors are among an entrepreneur’s family and friends. The capital angel investors provide may be a one-time investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages.”

angel investors website

These investors are usually only in for a one-time deal. Many do not lend to the same person twice, even if that person paid them back perfectly.

They choose to spread their risk out over many people and many businesses to insure they get a safe return on their investment.

Angels tend to be a lot more informal than most types of funding. They can be people you know. Or they can be people you connect with through networking or other means. And yes, your mom can be one, too.

History of This Type of Investing

The term comes from Broadway theater. Angels were originally the investors who backed plays. And they still do so. They are also called patrons of the arts.

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Who Can be This Kind of Investor?

Angels are not covered by the Securities Exchange Commission’s (SEC) standards for accredited investors. But a lot of them are accredited investors anyway. 

What is an accredited investor? It has to do with money. To become an accredited investor, an person has to have a minimal net worth of $1 million, and an annual income of $200,000.

Who Else Can be This Kind of Investor?

There are a number of angels who aren’t millionaires. They could be friends or colleagues sitting on home equity, or local professionals who are looking to invest. Consider people you know well and people you don’t know so well. If you’re asking, where are angel investors near me, they could be people you grew up with or have done business with.

What do Angel Investors do?

They are informal investors, and they generally invest in the start of a company. This is in exchange, usually, for equity. They can even invest via a crowdfunding platform.

What Sorts of Risks do These Investors take on?

These are investors who often seed startups. If those startups fail in their early stages, they will lose their investments completely. Therefore, professionals will look for opportunities for a defined exit strategy, acquisitions, or initial public offerings (IPOs).

What Sorts of Returns do These Investors Normally See?

The effective internal rate of returns for an angel investor’s successful portfolio runs from 20 – 30%. This is a higher rate than banks will take. But bank loans and credit are often not an option for startups. As a result, these kinds of investments can be ideal for entrepreneurs who are still financially struggling during the startup phase.

How Do You Find These Types of Investors?

The best way how to find these kinds of investors is to ask. Or try an angel investors website or an angel investors network. A way how to angel investors online is to try Gust, which used to be called Angel Soft. They keep a database of investors, companies, and programs. Startups can also search for business plan competitions and more.

Working with Gust

Look up investment groups, this includes a profile with information on which industries they typically fund. To look up programs, this includes deadlines and basic information like the dollar amount they fund. If you look up companies, the data includes a profile where the founders can add basic data and a pitch video. 

Gust gives the search for these kinds of investors more organization. But it’s not the only way to find angels

Other Ways to Find These Sorts of Investors

Entrepreneur Magazine suggests angel investors list sites like Funding Post and ACE-NET. They also suggest trying every possible investor because being turned down by 100 investors doesn’t mean the 101st will turn you down. Entrepreneur notes that these kinds of investors will often start small. So, if you can prove your concept to them, and they start to see success, they might add more funding.

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What frustrates you the most about funding your business? Check out how our free guide can help.

The Biggest Groups For These Sorts of Investors

You can also look at the biggest angel investor groups. But be aware that these meetings are really only going to happen if you can get an introduction.

According to Entrepreneur, in order from smallest to largest:

  1. New York Angels Inc.
  2. Alliance of Angels (Seattle)
  3. Pasadena Angels
  4. Hyde Park Angel Network (Chicago)
  5. Band of Angels (Menlo Park, CA)
  6. North Coast Angel Fund (Cleveland)
  7. Golden Seeds LLC (NYC)
  8. Investors’ Circle (San Francisco)
  9. Tech Coast Angels (Los Angeles) and
  10. Ohio Tech Angel Funds (Columbus, OH)

Groups’ focusing and requirements vary; some concentrate on local startups only. Read up before you ask; don’t waste yours and the angels’ time if there won’t be a fit.

What are Affiliated and Unaffiliated Angels?

Affiliated angels are people you know, such as friends and family, plus coworkers, managers, and employees. Customers, suppliers, vendors, and even competitors can be angels.

And given that there is still a huge gender gap when it comes to this sort of funding, ask women in your area. That way, you can help to increase the number of women angel investors out there. And that’s a good thing.

Unaffiliated angels are the people you don’t know, such as area professionals, entrepreneurs, or middle managers unsure about their financial futures, looking for an investment. Unaffiliated investors are likely to, obviously, need more assurances from you than the people you know will.

How can a Company get Angel Investing?

Companies can connect to affiliated persons by just asking. Companies connect to unaffiliated people in much the same way they can connect to other people who can help them who they don’t know, or don’t know well. This can be accomplished via cold calling, advertising, or working with business brokers. Plus there’s the old standby – intermediaries and networking.

The Pros Of Working With These Sorts of Investors

Interest rates and fees with this kind of investors can also be very favorable, sometimes better than bank rates and terms.

Even though US angel investors are a great source of business funding, there are some things you want to be cautious about before you commit with an investor.

Despite their name, these sorts of investors are not there to rescue the business.  These investors are usually businesses or individuals who have money to lend but expect to take a safe risk and earn a decent return on their investment.

Angel Investors vs Venture Capitalists

These are not exactly the same thing. Top angel investors will generally invest in early-stage or startup businesses in exchange for a 20 – 25% return on their investment. These types of investors tend to invest less, and will also want less control, than venture capitalists tend to.

Venture Capitalists

Venture capitalists will also give funds in order to help build new startup companies which the VCs strongly believe have both high-growth and high-risk potential. These might be fast-growth companies with an exit strategy already in place, and they can get up to tens of millions of dollars for investment, networking, and growing their business. Essentially, this is a gamble on possible future profits. Also, venture capitalists will often try to recoup their investment within a 3 – 5 year time frame. They will also, normally, want to acquire a portion of your company if not a controlling stake, so understand that.

People like Jeff Clavier do both, probably depending on the amount of risk and the expected amount of return. More about him in a moment.

The Cons Of Working With These Kinds of Investors

Another concern with these sorts of investors is that they typically want a percentage or part of the company to lend the money. Sometimes they want a small stake, and other times they want full control and 51% ownership.  But in most cases they do want a percentage of the company itself.

When the investor does want a stake in the company, it is important that the terms are acceptable for the business owner as well.  The investors’ funds can really help grow a business, but the trade-off of handing over part of the company means the deal has to be worth it for the business owner as well as the angel investor.

Another concern with this type of investors is they will sometimes commit – for a time. But then they don’t follow through and close on the transaction.  For this reason it is essential that the business owner not spend any of the funds until the deal is completely done and the funds are in the bank.

Nothing is worse than committing those funds only to discover that the deal falls apart and the angel investor never delivers the funds.

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What frustrates you the most about funding your business? Check out how our free guide can help.

Who Are Some Well-Known Angels and Their Investments?

Who is the Most Prolific Angel Investor?

According to Inc. Magazine, the biggest angel investor is Jeff Clavier. He has invested up to $6 million in almost 20 companies. He is the founder of a seed venture capital company in Silicon Valley, Uncork Capital. He is both an angel and a venture capitalist, and is certainly the best-known of all Silicon Valley angel investors.

What was the Most Profitable Angel Investment of All Time?

Google!

Jeff Bezos gave $125,000 in 1998, investing at 4¢/share. Bezos also got in on Twitter in its second round of funding. This is why, according to Bloomberg, he’s worth over $100 billion.

Angel Investments and Investors: Takeaways

Angels can be a great source of money for your business.  But make sure you watch out and make the best decisions for you and your business if moving forward with this type of investor.

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