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What is an Angel Investor?

2017-08-19T08:26:43+00:00

The term 'Angel Investor' is included in the Corporate Finance edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

An Angel Investor refers to an accredited investor (with over a million dollars net worth) which invests funds into entrepreneurs and smaller startups. These special investors are commonly from the friends or family of the entrepreneur. This capital which they deliver is often in the form of a lump sum one-time payment to help get the business going or to keep it funded during the challenging early stages where they are still developing and beginning to market their products.

Another characteristic of such an Angel Investor is that they offer better terms to the startup than would a comparable bank or lender in the same scenario. This is principally because they believe in the entrepreneur they are backing more than the viability of the business itself. Such investors concentrate their efforts on assisting startups with successfully making their initial business steps. They are less concerned with the potential for profit they might make off of the fledgling company. This makes most Angel Investors the diametric opposite of the venture capitalists.

There are a variety of different names which such Angel Investors go by. These include angel funders, informal investors, private investors, business angels, and seed investors. Such wealthy individuals who choose to inject desperately needed startup capital into firms do so in exchange for either convertible debt or a stake in the company’s equity. There are such investors who become involved through one of the various crowd funding platforms over the Internet, and others who join with networks of other Angel Investors in order to pool their resources to be more effective (as with an Angel Investor syndicate). Angel List is a popular and well respected site that puts together angels and entrepreneurs.

Using this phrase to describe noble investors originally came from Broadway Theater. It was here that wealthy patrons would contribute money in order to advance theatrical productions. This terminology Angel Investor was first utilized by William Wetzel of the University of New Hampshire. As founder of the Center for Venture Research, he backed an extensive study on the ways that entrepreneurs are able to bring in capital.

In order to be official Angel Investors, these individuals have to meet the definition set by the SEC Securities Exchange Commission for accredited investors. This means that the interested party must possess at least a million in net worth along with an annual income amounting to at least $200,000.

Most Angel Investors will actually deploy their own funds in their investments. This puts them in direct contrast with the venture capitalists which instead gather up a pool of money from many investors and then combine this into a fund which is strategically managed. In general the Angel Investors represent actual individuals. It is also possible for the entity offering the funding to be a limited liability company, trust, business or even an investment fund.

Those Angel Investors who actually seed the entrepreneurs’ startups which ultimately fail will lose their entire investment. It helps to explain why angel investors who are professionals will always be on the hunt for a clearly defined exit strategy opportunity. This might be through an IPO Initial Public Offering or an acquisition.

In truth, successful angel investors boast of portfolios with an average success rate of from 20 percent to 30 percent. This may sound costly for entrepreneurs who are involved in early stage business startups. Finding alternative cheaper sources of financing like banks are not often viable options for these fledging companies. It means that angels are often the ideal funder or backer for those entrepreneurs who find themselves still in the financially struggling days of the early startup stages in their company.

The term 'Angel Investor' is included in the Corporate Finance edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.