Angel Investor

Loading the player...

What is an 'Angel Investor'

Angel investors invest in small startups or entrepreneurs. Often, angel investors are among an entrepreneur's family and friends. The capital angel investors provide may be a one-time investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages.

BREAKING DOWN 'Angel Investor'

Angel investors provide more favorable terms compared to other lenders, since they usually invest in the entrepreneur starting the business rather than the viability of the business. Angel investors are focused on helping startups take their first steps, rather than the possible profit they may get from the business. Essentially, angel investors are the opposite of venture capitalists.

Angel investors are also called informal investors, angel funders, private investors, seed investors or business angels. These are affluent individuals who inject capital for startups in exchange for ownership equity or convertible debt. Some angel investors invest through crowdfunding platforms online or build angel investor networks to pool in capital.

Origins of Angel Investors

The term "angel" came from the Broadway theater, when wealthy individuals gave money to propel theatrical productions. The term "angel investor" was first used by the University of New Hampshire's William Wetzel, founder of the Center for Venture Research. Wetzel completed a study on how entrepreneurs gathered capital.

Who Can Be Angel Investors?

Angel investors must meet the Securities Exchange Commission's (SEC) standards for accredited investors. To become an angel investor, one must have a minimum net worth of $1 million and an annual income of $200,000.

Source of Funding

Angel investors typically use their own money, unlike venture capitalists who take care of pooled money from many other investors and place them in a strategically managed fund.

Though angel investors usually represent individuals, the entity that actually provides the fund may be a limited liability company, a business, a trust or an investment fund, among many other kinds of vehicles.

Investment Profile

Angel investors who seed startups that fail during their early stages lose their investments completely. This is why professional angel investors look for opportunities for a defined exit strategy, acquisitions or initial public offerings (IPOs).

The effective internal rate of returns for a successful portfolio for angel investors ranges from 20 to 30%. Though this may look good for investors and seem too expensive for entrepreneurs with early-stage businesses, cheaper sources of financing such as banks are not usually available for such business ventures. This makes angel investments perfect for entrepreneurs who are still financially struggling during the startup phase of their business.

RELATED TERMS
  1. Archangel

    An angel investor who has invested in a number of ventures that ...
  2. Funding Gap

    The amount of money needed to fund the ongoing operations or ...
  3. Note

    A financial security that generally has a longer term than a ...
  4. Option Pool

    Shares of stock reserved for employees of a private company. ...
  5. Venture Capitalist

    An investor who either provides capital to startup ventures or ...
  6. Retail Investor

    Individual investors who buy and sell securities for their personal ...
Related Articles
  1. Managing Wealth

    Who is an Angel Investor?

    An angel investor is a wealthy individual that agrees to invest in a small startup company that has little access to capital.
  2. Trading

    When Your Business Needs Money: Angel Investors

    If you have a promising business that needs a boost, you may be able to put your faith in these wealthy investors.
  3. Managing Wealth

    Angel Investing vs. Crowdfunding: How to Raise Money for Your Startup?

    Angel investing and crowdfunding are two very different options startups can use to get the funding they need.
  4. Personal Finance

    How Much Money Do You Need to Live in Los Angeles?

    Learn how much money it takes to live in Los Angeles and how that amount varies based on whether you are a student, professional or unemployed job-seeker.
  5. Managing Wealth

    Protecting Your Idea From Angel Investors

    If you need outside financing to grow your business, be careful about whom you decide to talk to and what information you offer them.
  6. Personal Finance

    Traveling to Los Angeles on a Budget

    Understand why you do not have to break your budget to vacation in Los Angeles, despite the city's reputation as a playground for the rich and famous.
  7. Investing

    Tempted by Fallen Angels

    As a swathe of the commodities sector is stripped of its investment-grade ratings a few gems will inevitably get caught in the fallout.
  8. Personal Finance

    The Most Expensive Neighborhoods in Los Angeles

    Understand the layout of the greater Los Angeles area and what is driving up home values. Learn about the top eight most expensive places to live in LA.
  9. Trading

    Retirement Funds To Fund Startups

    Retired entrepreneurs who have "played it safe" and retirees who want to stretch their dollars are looking to invest here.
  10. Investing

    Understanding Capital Investment

    Capital investment is a term that describes a company’s expenditures for long-term assets used in the operation of its business.
RELATED FAQS
  1. Where does venture capital come from?

    Obtaining funding from venture capitalists is the way to go for those who have great ideas with potential for becoming lucrative ... Read Answer >>
  2. What risks does an entrepreneur face?

    Find out if you have what it takes to overcome the challenges and risks associated with starting a business and becoming ... Read Answer >>
  3. How does an entrepreneur pay taxes?

    Find out what kind of impact tax policy can have on entrepreneurship in the United States and why all economic agents have ... Read Answer >>
  4. What exactly is a startup?

    A startup is a young company that is just beginning to develop. Startups are usually small and initially financed and operated ... Read Answer >>
  5. How do venture capitalist investors view sustainable growth in a startup?

    Discover how venture capital investors view sustainable growth in a startup. Venture capitalists look to identify startups ... Read Answer >>
  6. How is venture capital different from other kinds of equity financing?

    Learn how venture capital equity financing differs from other funding options and what companies need to be aware of prior ... Read Answer >>
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  3. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  5. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  6. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
Trading Center