CapitalPitch Blog

What is an Angel Investor?

[fa icon="calendar"] 04/05/2016 3:30:00 PM / by Jeremy Liddle

Jeremy Liddle

An angel investor or business angel is basically any private investor who finances early-stage enterprises. Even though anyone with sufficient personal wealth can become an angel investor, such people are often entrepreneurs or retired executives with business experience. With the growth of startup culture business angels and more recently angel groups and syndicates are becoming more and more common. According to the Center of Venture Research, the US alone had about 300,000 active angels that collectively invest over $24 billion per year.

What is an Angel Investor

Securing a high ROI is rarely the sole motivation for business angels. Such people are often excited by making a positive change in the world; being on the forefront of innovation; and mentoring the next generation of entrepreneurs. You should always keep this in mind when approaching angels – it’s not all about the money.

And just for you, here's our full overview of Angel Investors:

Take me to the Complete Angel Investor Resource Page

How much money do angels invest?

Angel investors  fill the gap between “family & friends” seed funding and venture capital. In monetary terms, the average amount of capital raised by a company that received funding from business angels is close to $350,000. Nonetheless, there is great variance in practice. Many individual angels aim to enter quality ventures from as early as possible and invest low seed funding amounts (even just a few thousand dollars), while angel groups are capable of raising several million dollars.

Consequently, the investment amount is rarely the thing that is going to scare angels away – if they cannot raise the money alone, but like the idea and want in, they are likely to involve fellow investors or even a whole angel group to raise the round. What might deter angel investors are poor return on investment prospects. Early stage investing is exceptionally risky and angels are fully aware that most of the companies they back will not make it. To make startup investing financially viable, the ones that do make it need to have the potential to make it big and compensate for all the ones that do not.

At what stage should my business try to attract angels?

The thing that interests business angels the most is not the current size of your business, rather its potential. Consequently, there is no such thing as a too-small or a too-young business for angels – some are willing to invest even in an idea, if it is viable and the team behind it is solid enough.

According to statisticbrain.com, around 40% of the businesses that receive funds from angels are in their seed stage and another 40% are early (Series A) stage companies. The remaining are in a late stage, and it is worth noting that a large portion of later stage angel investments are by investors that have participated in early stages as well. Of course, finding investors in the different stages presents different challenges.

Seed stage, pre-revenue

At this stage your goal is typically to get enough funds in order to create a prototype of the product/service and to take it to the marketplace. The obvious problem is that you need to attract an investor without having any financial data to prove your concept and needless to say this is a difficult task.

This is where what we said about angels not being solely financially motivated comes into play. You need to find the right person/people to believe in your concept. Going for angels who have experience in an industry related to your idea or history of investing in similar ventures is your best bet. They are not only more likely to see the potential of your idea, but with their experience and expertise they will be useful beyond the investment (more on that in the next section).

Early stage, post-revenue

Once you have your proof of concept you can use it to attract further, more substantial investments. The focus shifts away from the actual concept and falls more on your ability to penetrate your market and grow your company in order to reach its full potential. This is when you can start reaching out to investors via Capital Pitch.

Angels bring value…

A recent Harvard research by Professors Kerr, Lerner, and Schoar gives evidence that startup companies funded by angels have historically been less likely to fail than firms that rely on other forms of initial financing.

This result is rather intuitive since “other forms of financing” includes debt, which directly increases the company’s risk of facing liquidity problems. Nonetheless, a very small portion of startups are funded through debt because of its unavailability for young businesses. This means that the explanation for that finding lies elsewhere.

The most likely reason, according to this research is the fact that angel investors invest not only their money but also their time in order to make the companies they back successful and their investments fruitful. This invested time could be extremely valuable and could increase the chances of the business to succeed if the experience and expertise of the angel investor is relevant to the startup.

As we mentioned, angels often are entrepreneurs of their own, executives or people with business experience in general. In that sense the advice they offer to the business is the equivalent to free management, financial, legal or marketing consulting and adds a lot of value. This further emphasizes the importance of bringing on board an angel with relevant experience. Such a person is more likely to believe in your idea, more likely to support it long term rather than look for the short term exit and most importantly – more likely to contribute with more than money. Giving a substantial share of your business to the right person could actually be the best move you can make, since it directly increases your chances of success.

Besides with experience, it is worth noting that the angel brings a lot of value with his/her social network – the more experienced a person, the bigger and relevant social network he ought to have.

Angel Investor flying

How to approach an angel investor

Getting in touch with angels is no easy feat if you do not have the right connections already. Even angel groups work on the principle of warm calls and do not always have a regular fill-in-to-apply form. What this means is that you actually need to find the connections to make the warm call for you.

To do this, you can rely on old-fashioned networking. Reach out to people, tell them about what you are trying to achieve, ask them to refer you to other relevant people and eventually you should reach the investors. Nowadays this process is made a bit easier by the popularity of startups – attending events and conventions about entrepreneurship and using the social media platforms could allow you to reach the right people faster.

Up until today, this approach has been challenged by the fact that angel groups usually have had a local focus. Some group even host their own events, so if you are close in proximity it should not be an insurmountable task to find the connections to the angel group in your own community. However, for most startups, this is not the case and online platforms where investors can get in-depth insights on your business are therefore at the edge. This is why we channel you through several steps of vetting before you can make introductions on Capital Pitch. 

Download 101 Questions an Angel Investor should ask

 

Topics: Investor, Angel Investors

Jeremy Liddle

Written by Jeremy Liddle

Jeremy is Co-founder and Executive Director of CapitalPitch, a Digital Investment Firm that accelerates founders for impact on the world by helping Pre-Series A tech companies and sophisticated, professional and institutional investors; providing a capital raising platform, Venture Capital investment funds and advisory services from Seed to IPO or acquisition. Jeremy has been an entrepreneur for over 17 years; he served as President for the G20 Young Entrepreneurs Alliance in Australia for 5 years and has worked on youth employment and entrepreneurship with the United Nations, Global Entrepreneurship Week and G20 Business task forces. Jeremy is a Tedx speaker and author of the Book “From Idea to Start-up”.

    FREE EMAIL UPDATES
    Get the latest content first.

        

    Download Pitch Deck