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.
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.