What is an Angel Investor?

Angel investors bring more than just funding to your start-up. They often also offer additional support, like a professional network to tap into and business expertise, that could be crucial to getting your business off the ground.

Jeff Salway, Connor Campbell Last updated on 21 April 2022.
What is an Angel Investor?

Whether you are looking to expand, clear debts, boost your cash flow, invest in new equipment or take advantage of specific opportunities, the question of finance and how to get it is rarely far away for small and medium-sized businesses.

A loan from a bank or a building society will often be the starting point. But there are other options worth considering too, especially for relatively new businesses. These include turning to angel investors.

Below we dig into what an angel investor is, how they work, and what to be aware of before considering them for funding.

Angel investor meaning

Angel investors are typically wealthy individuals who want to generate decent investment returns by helping out small, private, enterprises.

They can either invest on their own, as part of a group called an ‘angels syndicate’ or through equity crowdfunding platforms, where their money is deployed along with that of other investors.

They are sometimes referred to as seed investors, as they tend to favour start-up businesses needing an injection of capital to get off the ground.

How angel investing works

The main form of support that angel investors offer is a sum of money in return for a stake in the business. This could either be through your business immediately offering them ownership equity, or convertible debt that will later become stock.

It’s not just about money though. Angel investors will often be individuals with experience in supporting, leading or building up businesses, so they can also bring value through their experience, knowledge and the potential contacts they can access.

This isn’t guaranteed, however. Some angel investors may choose to remain ‘silent’, leaving you to run your business without assistance, and free to sell up when they see fit. Collaborating with an angel investor is different to finding a new business partner, who will likely be more invested in the long-term performance of your business.

Angel investors vs venture capitalists

While both angel investors and venture capitalists invest money into businesses in exchange for equity, there are significant differences to be aware of.

Angel investing

Venture capital

Who is investing?

An individual investor, though sometimes a group of individuals called an ‘angel syndicate’

Usually an entire firm, including private investors and board members

How much is being invested?

Normally offer ‘seed funding’, between £15,000 and £500,000

Significant, multi-million-pound investment

Who is being invested in?

Typically early-stage businesses, such as start-ups

More established businesses with a longer trading history, though start-ups with strong long-term potential may be able to access venture capital

How are they motivated?

By profit, but also potentially because they find aiding early-stage businesses rewarding; they want to give back; or they want to support causes they are passionate about

Purely by profit, and the return on the initial investment

How will they be involved?

Can provide expertise and assistance. How personally involved they are with your business will depend on the terms of your arrangement, and the individuals themselves

Will often want a controlling stake, such as a seat on the board of directors, and typically play an active role in how your business is run

What questions might an angel investor ask?

Angel investors usually invest in early-stage businesses where there is a risk of not getting their money back. They will want to establish a firm understanding of your business model, your aspirations, how you intend to build the business, the market research you have carried out and your own commitment to the journey.

They will also want to review your financial situation, which will likely involve exploring your cash flow, your projections for the coming business years, the cost of customer acquisition and how the proceeds of the fundraising will be used, among other factors.

In this sense, although angel investing differs from traditional financing options such as business loans, you will still need a similar level of preparedness when approaching both types of funding.

How can I find an angel investor?

Once you have set out exactly what you need from an investor and the issues they can help you with, there are several ways to start searching.

There are numerous online platforms that can help you find an angel investor, or angel investor networks, including LinkedIn, angel investor communities such as the Angel Investment Network and the various equity crowdfunding platforms available. You can subscribe for free to the UK Business Angels Association, the trade body for angels and early investing for guides and its membership directory.

Advantages and disadvantages of angel investors

As with any form of business funding, there are advantages and disadvantages to consider.

The advantages include:

  • the greater risk that angel investors may be prepared to take on in pursuit of returns, compared to a bank, for example
  • their knowledge and experience
  • networks they can provide access to
  • the fact that you don’t have a loan to repay (instead, they will take a stake in your business)

There are flipsides to each of those points, however. These include:

  • As well as taking a stake, investors may also want a say in the business and how their funding is used, potentially reducing your control over the operation. Their stake could also end up being worth a lot more than a loan that you would have repaid.
  • There may be a lot of pressure to produce the returns the investors want.

» COMPARE: Start-up business loans

What other funding options could I consider?

Angel investors can be used in addition to other types of funding, not just instead of them. Alternative sources of business funding range from bank and building society loans (both short- and long-term), government grants, rolling credit facilities, asset financing and venture capital funding.

Each has different criteria and a range of pros and cons.

» MORE: Funding options for expanding your business

Image source: Getty Images

About the authors:

Jeff is a freelance journalist who writes across finance & business. He was the personal finance editor at The Scotsman & Scotland on Sunday & a member of the Financial Services Consumer Panel. Read more

Connor is a writer and spokesperson for NerdWallet. Previously at Spreadex, his market commentary has been quoted in the likes of the BBC, The Guardian, Evening Standard, Reuters and The Independent. Read more

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