Definition Of Angel Investor

On this webpage, we will be discussing The Definition Of Angel Investor. In this type, an investor puts up capital in other to assist a company that is in its early stages of development. Difference Between Angel Investors And Venture Capitalists, Benefits And Disadvantages of Angel Investor.

Unlike venture capitalists, who are generally bound to a professional venture capital firm that invests a pooled sum, angel investors are lone individuals that take their own risks and finance their supported vision.

Definition Of Angel Investor

 For backing a new start-up, In return angel investors are often rewarded with equity in the company. For instance, If a venture is successful, angel investors get to make back their investment and more.
In the world of crypto, a lot of new blockchain companies are financed through angel investors who are often scouted via investment and entrepreneurial networks. An angel investor is also known as a business angel, informal investor, angel funder, private investor, or seed 
investor, is an individual who provides capital for a business or businesses start-up, while aiming an exchange for convertible debt or ownership equity. They usually give support to start-ups at the initial moments, when the risks for the start-ups failing are relatively high, also when most investors are not prepared to back them. In a survey carried out by Wilbur Labs on 150 founders, about 70% of entrepreneurs will face potential business failure, and nearly 66% will face this potential failure within 25 months of launching their company. 

Angel investors have greatly increased in the last 50 years, the NACO global summit which was established in 2022 was an online event hosted by the capital organization ( Canada)of National Angel in partnership with the Angel Capital Association (US), European Business Angels Network (EBAN), Global Business Angels Network (GBAN) and also more than 20 other organizations. This unprofitable event granted the entrepreneurs and the general public access.

More facts on Angel Investor


This investor is also known as an angel funder or private investor, seed investor is a high-net-worth individual who provides financial support to small startups or entrepreneurs, typically in exchange for ownership equity in the company. Most times angel investors are found among an entrepreneur’s family and friends. The funds they provide may be a one-time investment to help the business get off the ground or an ongoing injection to support and carry the company through its difficult early stages.

How To Understand Angel Investors


First of all angel investors are individuals that wish to invest at an early stage of a startup business. These types of investments are usually risky and do not represent more than 10% of this investor’s portfolio. Most angel investors have excess funds available and are looking for a higher rate of return than those provided by traditional investment opportunities. They also provide more favorable terms compared to other types of investors or lenders, since they 
usually invest in the entrepreneur starting the business rather than the viability of the business. Angel investors are focused on helping startups take their first steps, rather than on the possible profit they may get from the business. They are essential, the opposite of venture capitalists. Likewise through crowdfunding platforms online or building an angel investor network, some angel investors invest in others to pool capital together.


The Origins Of Angel Investors


The word “angel” originate from the Broadway theater when money to propel theatrical production was given by wealthy individuals. The word was first used by the University of New Hampshire’s William Wetzel, which was the founder of the Center for Venture Research. He completed research on how entrepreneurs gathered their capital.

Who is An Angel Investor?

Angel investors are usually individuals who gained “accredited investor” status but this isn’t a prerequisite. An accredited investor is defined by the Securities and Exchange Commission (SEC) as one with a net worth of $1M in assets or more excluding personal residences, or have earned $200k in income for the previous two years, or has a combined income of $300k for married couples. Therefore being an accredited investor is not synonymous with being an angel investor. Most importantly these individuals both have the finances and desire to provide funding for startup

An Angel Investor Sources Of Funding


Typically angel investors make use of their own money, unlike the venture capitalists who take care of pooled money from many other investors, placing them in a strategically managed fund

Although, usually an angel investor is represented by individuals, the entity that actually provides the funds may be a limited liability company (LLC), a business, a trust, or an investment fund, among many other kinds of vehicles.

Investment Profile


The fear of losing their investment completely in a startup business makes angel investors look for opportunities with a defined exit strategy, acquisitions, or initial public offerings (IPOs).22% is an effective internal rate of return for a successful portfolio for an angel investor Though this may look good for investors and seem too expensive for entrepreneurs with early-stage businesses, cheaper sources of financing such as banks are not usually available for such business ventures, thereby making angel investments perfect for entrepreneurs who are still struggling financially during the startup phase of their business.

Over the past few decades, angel investing has grown as the lure of profitability has allowed it to become a primary source of funding for many startups. This, in turn, has fastened innovation which translates into economic growth.

How Does Angel Investing Function


Angel investors always prefer to get assistance in the early stage of a company. At its “seed” or “angel” funding phase. Meaning that the angel invests only when the company exists as an idea, or it could come when a business is already up and running. Sometimes angel investors arrive on the scene after the initial round of funding, which normally comes from the founders themselves, friends and family of the founders, or from bank financing. Typically, funding for an initial business isn’t substantial, likewise, it’s common for founders to roll out their product or service with $10,000 or so in initial funding. Typically before a company requires a more sizable investment from a venture capital company, Angel investors come in after the original funding is in place.
This investment is needed to grow a company at a critical stage of development after the initial funding threatens to run out and before venture capital groups show their interest in partnering with a promising business.

Definition Of Angel Investor

Here’s how the investment actual process rolls out:

  • Angel investors through word of mouth, business and industry seminars or conventions, connect with young, developing companies. Also through referrals from professional investment organizations, from online business forums, or via local events like chamber of commerce meetings.
  •  The angel investors will conduct If there’s a mutual interest. Due diligence on the young company by talking to the founders, thereby reviewing business investment documents. And gauging the industry the company is targeting.
  •  A term sheet or contract is drawn up, with agreements on the investment terms, payouts, or equity percentages. Investor rights and protections, governance. And control parameters will occur once a verbal agreement between angels is in place and eventually exit strategy for the angel investor.
  • Also once the contract is finalized an actual legal agreement is created and signed. The deal is officially closed and the investment funds are released for the company’s use.


Funding levels can be as low as $50,000 while contribution amounts vary, and as high as $150,000. Some angel investors group together as a syndicate and can provide funding up to $1 million for select companies.  Usually, Angel investors don’t acquire more than a 25% stake in a company. 

However, Veteran angel funders know that the company founders need to hold the highest stake in their companies. As they also have the highest incentive to make their companies successful.

Difference Between Angel Investors And Venture Capitalists

Despite the fact that both angel investors and venture capitalists (VCs) fund companies. In exchange for a piece of the action. There are significant differences between these two entities.

Although both invest in start-up businesses, they typically put in money at different stages in the process.“An angel investor is more likely to provide capital for an idea. While the majority of VCs would like a proof of concept in hand. ” which was described by Courtney Lawless, a venture capitalist at Philadelphia-based MoxeHub.

Definition Of Angel Investor


Another difference is that the source of funds is, Angel investors are private investors who invest their own money. While Venture capitalists are professional investors. Who generally invest other people’s money. Rather than their own money (although that’s not to say they never put in their own dollars).  Also, Angel investors are more likely to keep a “hands-off” policy on company involvement. Whereas Venture capitalists, on the other hand, almost always take a board seat and are involved operationally in a company.

Benefits And Disadvantages of Angel Investing


There are lots of reasons why emerging startup companies might partner with an angel investor which are listed below


Benefits Of Angel Investor

  •  They have no obligations, most angel investing involves equity deals. Because they haven’t applied for a new line of credit and if the company goes belly up. Then business owners don’t have to pay the angel funder back.
  • Usually, an angel investor is an entrepreneur, too, who most times have an abundance of business knowledge and experience. “Especially valuable are financial backers who have established effective organizations by themselves. ” says an accredited angel investor Garett Polanco who’s founded 29 companies.
  • They exhibit less administrative work, whereby organizations that raise financing from angels are free. From onerous investment filings with the U.S. Security and Exchange Commission (SEC) and state regulators. That they might have to if they decided to hold, for instance, an IPO to raise money.
  • There is more cash down the line, when an angel funds a company, they’re often in for the long haul. 

Disadvantages Of Angel Investor

  • They do have Less control, whereby Companies who work with angel partners. May need to give up some amount of equity. In their business, while that’s normally a small amount. Angel financial backers may decide they want a bigger role in the business decision-making.
  • Angel investors require compensation for their funding, said Lavinsky which typically comes in the form of equity. And could be more expensive than debt financing.
  • Potential for novice investors; this is a big disadvantage of taking on angel investing in winding up. With an inexperienced angel investor who offers poor advice or who hounds business owners for status updates. This especially can be the case with new angel funders who steer large amounts of money into a company.

Conclusion

Finding an angel investor is fairly a straightforward process. This starts by focusing your search on finding someone close geographically. As many angel investors love playing an active role in the business they fund. Polanco said, “We prefer to invest in businesses that are close to home. “The vast majority of angel investments take place within 50 miles of the angel investor’s home or office.”
The next thing to do is to target industry associations and digital platforms to locate a good angel investor. You might start with these below two angel organizations:

Definition Of Angel Investor


Angel Capital Association (ACA); This is the largest expert advancement association. When it comes to angels on a global basis, have more than 14,000 private backers. And more than 250 angel gatherings and licensing stages. It operates in countries such as the U.S., Canada, South America, and the Middle East.

Angel Messenger Forum (AMF); This is for new companies looking for equity financing of $100,000 to $1 million. Using AMF to make introductions to pre-screened private and corporate angel backers. Social media is used for small businesses seeking angel funding to find good angel investment candidates. 

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