An angel investor is an individual or company that offers funding to start-up ventures in return for ownership equity or convertible debt.
Unlike traditional financial institutions, angel investors support entrepreneurs in their early business endeavors. Some investors may participate indirectly through a fund or Private Placement Memorandum, without direct involvement in the business operations.
There are primarily two categories of angel investors:
Individual Investors
Individual angel investors are affluent individuals who utilize their personal funds to invest in startups. They may have a specific focus within a particular industry or prefer to diversify their investments across various sectors.
Angel Investment Groups
Angel investor groups, also referred to as angel networks or syndicates, consist of multiple individuals who combine their resources and jointly invest in startups. These groups serve as platforms for angel investors to collaborate on due diligence, share their industry expertise, and achieve portfolio diversification.
3 Ways How an Angel Investor Can Offer Funds to Your Startup:
– Convertible Loans: The most common approach is to provide the business with a convertible loan, which can later be converted into an equity position in the company once it gains momentum. In this scenario, the angel investor will typically seek a 20%-30% equity interest, granting them a say on the company’s board.
– Convertible Preferred Stock: The second option is to supply funds through a convertible preferred stock option while retaining a board membership. In this case, the investor defers dividend payments for the stocks until a later date.
– Direct Equity: The third option involves acquiring an equity position directly, such as a 20%-30% stake in the company. To protect their interests, the investor may appoint one or two associates to assist in overseeing the business.
Where to Look for Angel Investor?
Usually, angel investors tend to be:
- C-level company executives, who have risen through the ranks and know what it takes to run a successful business.
- Successful small business owners and entrepreneurs who have already launched successful companies and know how to recognize startups that have a bright and profitable future.
- Investors who make financing small businesses a professional pastime.
- Crowdfunding platforms that raise pools of money in groups, with each person investing a small amount in exchange for a small share of any eventual profits, if the company proves successful.
Pros of an Angel Investor
Financial Support
Unlike loans, you’re not responsible for paying back the funding from an angel investor because they receive equity in exchange for financing.
Flexible Terms
Unlike traditional funding sources, angel investors may offer more flexible terms, allowing for customized agreements that suit the specific needs and goals of the startup.
Less Administrative Work
Organizations that raise financing from angels are free from onerous investment filings with the U.S. Security and Exchange Commission (SEC) and state regulators that they might have to if they decided to hold, for example, an IPO to raise money.
Mentorship and Guidance
Because angel investors have a lot of business experience, they can provide mentorship for the startup. They have the motivation to see the business succeed and can offer invaluable insight and guidance.
Credibility and Connections
When an angel investor publicly supports a business, they help raise credibility of the founder and their value proposition. They convey they believe the business could be successful, which can attract other investors and funding to the project.
Cons of an Angel Investor
Equity Stake
While angel investors make it possible for business owners to get their startups running, they also get equity in the organization. Many business owners give away between 10% and 50% of their startups in exchange for funding.
Alignment Challenges
Founders may feel pressured to align with the investor’s goals, potentially impacting the company’s original vision.
Some angel investors sometimes want to have an exit strategy in place, such as taking a business public or selling the company to a larger corporation.
Lack of Industry Knowledge
Not all angel investors have expertise in the industry of the startups they invest in. This can be a disadvantage if the investor lacks understanding of the specific challenges and opportunities in the target market.
Companies that Have Used Angel Investors
Larry Page and Sergey Brin, the co-founders of Google, received angel investment from Andy Bechtolsheim, a co-founder of Sun Microsystems, to support the development of their search engine.
Uber
The ride-sharing giant received angel investment from several prominent individuals, including Chris Sacca and Jason Calacanis, which played a pivotal role in the initial growth and expansion of the company.
Airbnb
The home-sharing platform received angel investment from individuals such as Reid Hoffman and Y Combinator, providing crucial funding and support during its early stages.
Angel investments from Peter Thiel, an entrepreneur and venture capitalist, significantly contributed to the growth and success of the social media platform in its early years.
Angel investors such as Chris Sacca and Ron Conway played a pivotal role in supporting Twitter during its early days, contributing to the platform’s rapid growth and success.
The professional networking platform LinkedIn received early support from angel investors including Reid Hoffman, who later became one of the co-founders of the company.
The image-sharing and social media platform received support from angel investors, including Brian Cohen and Michael Birch, as it established itself in the market.
Spotify
The popular music streaming platform has received financial backing from various investors, including angel investors. A notable angel investor in Spotify’s early days was Shakil Khan, who is known for his involvement in tech startups and investments. His support and funding contributions were instrumental in Spotify’s expansion and success. Additionally, other angel investors and venture capitalists have played key roles in supporting Spotify’s growth and development.
AppDynamics
AppDynamics, an application performance management and IT operations analytics company, was backed by angel investors, including Jyoti Bansal, who was a key early investor in the company. The company’s strong early backing from angel investors played a significant role in its growth and success.
AppNexus
AppNexus received backing from several prominent angel investors, including Marc Andreessen, co-founder of Andreessen Horowitz, a leading venture capital firm. Additionally, Josh Stylman and Michael Walrath, co-founders of Right Media, were also among the angel investors who provided support for AppNexus. These investors played a crucial role in the early success and growth of AppNexus, a technology company focused on digital advertising solutions.
Resources to Angel Investors
AngelList
AngelList is a widely recognized online platform that provides startups with the opportunity to connect with potential investors for funding partnerships. Designed to primarily cater to tech startups, AngelList serves as a dependable tool with extensive industry reach.
By creating both a personal and company profile, you can effectively list your startup in the platform’s directory, increasing visibility and positioning your venture to attract potential investors, while also facilitating angel investors in discovering your business.
Furthermore, AngelList offers an array of valuable products designed to support startups in managing equity, banking, and fundraising, providing essential resources for entrepreneurial success.
Gust
Gust stands out as a trusted angel investor network, boasting an extensive directory encompassing thousands of startups and accredited investors. The pre-qualified nature of these investors expedites the vetting process. Nevertheless, it’s imperative to conduct thorough research before engaging with any potential investors.
Furthermore, Gust offers direct assistance, guiding entrepreneurs in navigating the optimal path for securing funding. Establishing a profile on Gust also opens doors to a network of suppliers offering essential services such as website hosting and marketing. This presents a valuable opportunity for founders to streamline costs and enhance their operational efficiency.
Crunchbase
Crunchbase boasts an extensive database covering diverse aspects of tech funding, making it a valuable resource for professionals in the industry.
In addition to providing information about recently funded companies (an effective strategy for sales outreach and lead generation), Crunchbase offers a comprehensive list of top angel investors.
Through this platform, you can leverage their database to compile a list of potential investors for your venture and initiate outreach through cold emailing, helping you to forge valuable connections in the tech funding space.
