Who is an angel investor?

Attracting capital from angel investors is one of the most common ways of raising funds for a startup. In this article, we’ll give a definition of an angel investor, explain what they do, and share tips on convincing them to fund your business.

These people are also known as:

  • Angel funders
  • Business angels
  • Seed investors
  • Private investors
  • Informal investors

They act as private individuals and support promising startups in exchange for equity or convertible debt. They have accumulated considerable wealth and expertise. Such investors are ready to take high risks to get a chance to earn much more. Equity in a startup that takes off and scales might give them a much higher return than traditional investment opportunities.

Normally, angel investors transfer money to the founding team only once. The sum is usually not too high and rarely exceeds $100,000. Investors of this type are usually eager to support early-stage innovative startups with disruptive ideas that are likely to revolutionize their respective market niches. They prefer startups with defined exit strategies and good opportunities for IPOs or acquisitions.

Difference between angel investors and venture capitalists

Compared to other sources of funding, angel investors tend to be more flexible. They can believe in a great idea while banks are only interested in the client’s opportunity to return the borrowed funds. Angels are focused on the talent, energy, skills, and vision of founders.

Venture capitalists, when making funding decisions, assess the measurable potential of a business and not the personalities of its founding team. While angels invest their own money, VCs take cash from pools to which multiple companies and individuals contribute. They bear responsibility for the profit of all members.

Around one-half of all startups hope to get funding from venture capitalists. Less than 20% expect to get support from angel investors.

How to identify an optimal angel investor for your startup

When assessing your match potential with an angel investor, focus on these four factors:

  • Industry experience. If an angel investor has expertise in your niche, they will be more enthusiastic to support you. Apart from finance, they will share knowledge and industry contacts with you.
  • Mentorship ability. Ask the investor whether they would like to mentor you. Some might be unwilling to do so. Others might lack mentorship skills and are only ready to share money.
  • Investing experience. Experienced angels provide better mentorship.

Financial stability. Imagine that an investor writes a check to you — and in six months, they say their business is performing poorly and they need their money back. A good angel has enough cash for all the ventures they support and will never put financial stress on your startup.

The lack or presence of accreditation is a secondary parameter. Not all accredited investors are angels or vice versa.