Angel investors sound like they have a very critical role to play in our economy, and they do. Angel investors are often the reason why startups have enough capital to make their ideas big. A fantastic angel investor coming in at the right time can provide the funds necessary to catapult a business’ impact both financially and in terms of market share. Indeed, angel investors play a significant and impactful role in the startup scene.
If you are an entrepreneur, you may have heard stories of people who had the opportunity to work with an angel investor and be wondering what it’s all about and if it would benefit you and your company. If you are in the seed or Series A funding stages, the answer is almost unequivocally, yes. To understand why this type of investment would be beneficial to you and why you should work with an angel investor, let’s first take a look at what angel investing is.
What Is An Angel Investor?
The most succinct definition of an angel investor is a person with a high net worth that invests in startups during the early phases of the company. While the term “high net worth” is often up for debate, in this context, you’re looking at people that can afford to write $25,000 to $100,000 checks and not lose sleep that they might lose it on a bad investment. As such, the typical investor has a net worth north of $1 million. Some angel investors do more. They can invest whatever they want into the business, even millions if they so chose.
Typically, angel investors are also accredited, although there isn’t necessarily anything in the rules that requires this to be the case. Usually, though, if they have the net worth needed to make these types of investments, they’ll also want to be accredited since it provides them access to many investments that are not available on the open market.
Angel investors have different motivations for investing. A wealthy individual may invest in a company simply because he or she likes the idea and thinks it would make the world a better place. Another wealthy person might be looking for opportunities to make as much money as possible on their returns.
Generally speaking, though, all angel investors are looking for opportunities that can have significant growth. This growth isn’t doubling or tripling their money. They want returns of 10x or 20x. They know that many of their investments will, sadly, fail. As such, the ones that do succeed will need to be significant wins for them to come out ahead, on average.
Why Work With An Angel Investor?
Not all angel investors are the same. Since these investments come from individuals, companies, and family offices, every angel investor will be unique. However, in general, there are five reasons you should consider working with an angel investor.
Companies With An Angel Investor Are More Likely To Succeed
Harvard Business School did some research and found that angel-funded startups are more likely to succeed. Not only are they significantly more likely to be in business for four years or more, but they are also more likely to be able to raise capital outside of the angel investor. Companies that had angel investors had 30-50% more website traffic and website rankings.
Angel Investor Involvement Is Highly Predictive Of Success
Some angel investors will write a check and walk away, leaving the owner to navigate the business themselves. Other angel investors will want a seat on the board and to be actively involved in the industry. They’ll work with the business owner to get them the contacts necessary to make their company a resounding success.
The latter type of angel investor is the most predictive of overall business success. During the earliest stages of a company, having someone with a seat on the board who has the contacts, expertise, and capital needed to make your business a success is vital. You want someone who can help mentor and guide you as opposed to going at it alone.
When it comes to angel investing, if you want to be the most successful, then you truly want to work with an angel investor, not just have the investor write a check and walk away!
Raise Money Through Fewer Contacts And With Fewer Restrictions
Angel investors allow you to raise the money you need with fewer restrictions and with fewer contacts. Instead of trying to pitch your business to several friends and family members to try and get them to add $10,000 each to your business, you can get the $100,000 you need through an angel investor.
While angel investors do look for significant returns on their investment, if they make 10x or 20x their money back, your business must be doing well! Being able to raise the money you need with one or two experts who can give you the guidance you need beats raising smaller amounts of money from people who may or may not understand your particular business model.
Flexibility With Repayment Terms And Conditions
Since angel investing is between the owner(s) of the business and the investor, they can come to any terms they want. If you are willing to give up equity in the company, you can do so. If you wish to repay 10x their amount once you have a specific cash balance, again, you can do so. The terms you work out with the angel investor(s) you use are up to you. Of course, if you don’t like the terms, you can always decline an investment as well.
Angel investing is so early in the process that if you choose to work with an angel investor, you’ll learn a lot about yourself and the business style you have. You can define terms that you would be willing to accept and approach angel investors with those terms.
A Vote Of Confidence To Have Your Business Reach The Next Stage
Having your first angel investment is a significant vote of confidence in the business you are building. The fact that anyone is willing to write a check for your company and want to take an active interest in guiding it to success shows that your idea has serious potential. When Peter Thiel gave Facebook founder Mark Zuckerberg a check for $500,000, he was the first investor outside of the company. Little did he know, then, that when Facebook did its IPO in the 2010s, that check for $500,000 would turn into a windfall of $1 billion (a 2000x return on his money). Of course, Zuckerberg did much better with that $500,000 investment than he probably would have done without it.
Getting an angel investor on-board is a vote of confidence that your idea has significant value. Having that investor should make it easier to go up to other investors in the future and say, “Hey, one person thought my idea was good, here’s why you should invest in me as they did.”
It’s Never Too Early Or Too Late To Work With An Angel Investor
While much of the discussion around angel investing is in the startup phase because that’s when the most explosive growth happens, the reality is that any time you want to push your business to the next level, an angel investor can be beneficial. Even if your company has been around for a few years and you want to take it from 10,000 active users to 100,000 active users, you might want to work with an angel investor to make that happen. If you gave them a seat on the board and received their guidance, reaching that next level might be significantly less work than going it alone.
Some angel investors even work with entrepreneurs before they have their companies fully formed. There are unique ways to create companies such that they are most attractive to angel investors. If you plan on seeking angel funding, you may wish to seek legal and financial advice to ensure your business’ structure does not impede an angel investor’s ability to be a part of your company.
Angel Investors: The Angels Of The Startup World
As of today, over 90% of all seed capital for startups comes from angel investors. Angel investors are indeed the backbone of the startup world, providing funding and guidance for entrepreneurs who want to make their businesses not just survive, but truly thrive.
It’s important to note that when you work with an angel investor, you typically do not merely gain access to money. That’s helpful. Even more useful, though, are the contacts, expertise, and guidance that successful angel investors can provide. They have experienced what you’re going through many times. They have solutions and advice that will help you maximize your business’ potential. An angel investor is a powerful ally to have in the business world. They can make the difference between resounding success and failure.
If you want to give your business the best chance of success and you are ready to accept an angel investor, start the process of looking for one today. There are many positive reasons to work with one of these investors!