Angel Investing: How It Works and How to Start in 2025
Angel investing is risky, but potential high returns and satisfaction from nurturing a startup can make it worthwhile.
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Angel investing is a type of private equity investing in which high-net-worth investors take the high risk of funding new businesses in return for equity in the startups.
Angel investors provide up to 90% of outside equity raised by startups (excluding friends and family). Many entrepreneurs rely on the support of angel investors to help get their businesses off the ground.
How angel investing works
Angel investors typically finance startups at the very early stages. Often, these businesses might not even have customers or generate any revenue at all — they may have only a solid business plan, completed a beta test or built a minimum viable product.
Angel investors may make a one-time investment or ongoing capital contributions, depending on the company’s financing needs. In exchange for the cash, the startup usually gives the angel investor a certain number of shares, or the right to buy shares at a later time. The angel investor should do their due diligence before negotiating the amount of the capital investment and corresponding share of company ownership.
Capital from angel investors is frequently used for research and development, to help the company formulate its product and service offering, to design a business strategy or identify its target market.
Besides nurturing startups and new business ideas, angel investors are also looking for their investment to grow. This means they may keep close tabs on the startup’s affairs and become involved in decision-making to ensure their invested capital is used appropriately.
As the business grows and scales its production, operations and marketing, venture capitalists may enter the picture at this point to provide the next round of funding.
How does an angel investor get paid?
Angel investors realize their returns when there is an “exit opportunity,” such as the sale of the company, an initial public offering or the sale of their stake to another investor. It can take years to get to that point.
How much money do you need to be an angel investor?
There is no set investment minimum or size to be an angel investor. The amount might be $500, or it could climb to millions of dollars. It just depends on the opportunity.
However, the law prohibits companies from selling shares of stock or other securities unless those securities are registered with the Securities and Exchange Commission or have an exemption. One of those exemptions is for accredited investors. Accredited investors are people who have earned income of at least $200,000 for the past two years ($300,000 with a spouse) or have a net worth, alone or with a spouse, of at least $1 million in investable assets (excluding their home).
How to become an angel investor
1. Make sure you’re qualified to be an angel investor
As mentioned, angel investors usually have to be accredited investors in order to invest in new businesses.
2. Make sure you can add value
Angel investors can be accomplished entrepreneurs themselves, and they may have expertise or experience in the industry they’re investing in. They can bring guidance, networking and knowledge to the startup company in addition to their capital investment. This is important, because the startup may need help and guidance in order to survive.
3. Know how to source deals
There are several common ways that angels find companies to invest in.
Personal networks. Many angel investors have an established network of startup founders and entrepreneurs within their industry of expertise. Since they interact with these connections frequently, they often hear about new startups and can source deals to consider.
Other angels. When a seasoned angel investor decides to fund a venture, they can put together and lead an angel syndicate, where a group of angel investors collectively fund a particular deal.
Cold calls. You can reach out to a startup founder directly if you come across a company with an interesting new business concept that you’d like to explore and potentially invest in.
Angel groups. These are local communities of angel investors who assess and invest in startup ventures together. The Angel Capital Association’ and similar organizations can help you find a group to join or help you start your own angel investing group.
Pros and cons of angel investing
Could realize big gains.
Is a way to diversify investment portfolio.
Opportunity to coach, encourage and share skills.
You can lose all your money.
Takes a long time to realize return.
Can be uncertain and stressful.
Advantages of angel investing
Potential for big gains. With most investments, higher risk generally means higher potential rewards. Angel investors take on high risk, and they seek high returns. If their investment works out, angel investors could earn extremely high returns.
Portfolio diversification. Investing in early stage private companies has a different risk and return trade-off compared with investing in traditional stocks and bonds. This can diversify a portfolio.
Opportunity to pass the torch. Angel investors, especially those who are entrepreneurs themselves, may enjoy being involved in new industry developments and with founders.
Risks of angel investing
You can lose all of your money. Angel investing is risky because the investments or businesses are unproven. More than two-thirds of startups never provide a positive return to investors. While making money is possible, angel investors usually lose their entire investment. This is why experienced angel investors often invest in multiple startups in various industries — it helps mitigate risk.
You have to be patient. Angel investing isn’t a way to get rich quickly. For the startup to grow to the point where investors can make a rewarding exit, it can take seven to 10 years or more.
It can test your risk tolerance. It’s important to invest only money you won’t need to use in the near future, but also money you’re not too scared to lose.
» MORE: Ways to protect your assets
