Angel Investors: Who They Are and Where to Find Them
Angel investors can be accredited investors with net worth of at least $1 million or at least $200K in annual income.
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What is an angel investor?
Angel investors are wealthy people who invest their own money in startups or early-stage businesses. In return, they get a piece of your company.
This makes them a good source of funds for newer businesses that want to avoid taking out a small-business loan.
Many angel investors are “accredited investors.” That means they meet one of the following:
- Minimum net worth of $1 million.
- At least $200,000 in annual individual income.
- At least $300,000 in annual joint income.
Investment professionals who have a Series 7, 65 or 82 license may also qualify.
Angel investors can be friends, family, members of your professional or social networks, individuals or a team of investors. Angel investors often form “angel groups,” where they evaluate businesses and invest together. Pooling their money allows them to make larger investments, from thousands to millions of dollars.
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How does angel investing work?
In exchange for cash, most angel investors take ownership in the company they invest in. This is called equity financing.
An angel investor may also give money in exchange for convertible debt, which is a loan that can turn into equity later. Unlike small-business loans, you don’t need to pay an angel back.
For example, a company that's valued at $1 million might sell 20% of its equity, worth $200,000, to an angel investor or an angel group.
Many angel investors seek 10% to 30% of ownership in companies they invest in.
» MORE: Startup business grants and startup business loans
What do angel investors look for in a startup?
Angel investors usually look for startups that can grow quickly. Since investing in startups is risky, they want to know there’s a chance for strong returns.
To attract angel investors, show that your startup has:
- A unique product or service that scales.
- Strong market potential.
- An edge over competitors.
- A founder and team with passion and experience.
- A solid business model.
- A clear path to exit or profit.
Pros and cons of angel investors
Pros
Expertise. Angel investors often have startup experience and can act as mentors.
Connections. They may be able to introduce you to new customers, other financing sources, business partners and more.
Support. Because they have skin in the game, they’re motivated to help you succeed.
Deep pockets. If your business needs more money later, angel investors might reinvest.
Startup-friendly financing. Angel investors focus on your potential, not your credit score or collateral.
No repayment required. You don’t need to pay back the money.
Cons
Have to craft a convincing pitch. You’ll need to show that your startup is worth the risk.
Shared control. You’ll have to give up a piece of your company.
Due diligence required. Angels should share your vision and be willing to roll up their sleeves if seeking an on-hands partner.
Should you get an angel investor?
Consider seeking an angel investor or group if all of these are true:
- You run a startup and need money to grow.
- Your business has a high potential to grow quickly.
- You don’t mind giving away a share of your company.
- You want an experienced partner to help guide you.
How to find an angel investor
You can find angel investors here:
- The Angel Capital Association, which is an industry alliance of over 250 of the largest angel investor groups in the United States.
- Gust, which evaluates various funding sources for startups.
- MicroVentures, a crowdfunding platform that invests in startups that need $150,000 or more.
- The Angel Resource Institute, a nonprofit that provides education and information on angel investing.
Alternatives to angel investors
If you’re having trouble finding an angel investor, or you decide angel investing isn’t for you, there are some other options:
- Startup business loans. Online lenders or community development financial institutions (CDFIs) may offer business loans to startups. Unlike angel investments, you don’t have to give away a piece of your company. But you will have to pay back borrowed cash (with interest).
- Startup business grants. While grants offer free money, they can be hard to find and qualify for. They also come in much smaller amounts than loans or angel investments.
- Venture capital. Though similar to angel investing, venture capital (VC) is early-stage business funding by a firm or company instead of a wealthy individual. Venture capital can be slightly harder to qualify for, and usually VC firms invest in a company after an angel investor does.
- Equity crowdfunding. Online platforms that connect startups with groups of investors. Investors can be accredited or everyday people.
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