If you’ve got a startup, chances are you’ve heard of angel investors. After all, the funding for your big idea has to come from somewhere — and if your company is at the point where it’s looking for capital, an angel investor may just be your answer.
But before signing any contracts, you’ll want to explore the differences between angel investors and other types of funding (venture capitalists, for instance), as well as the pros and cons of partnering with an angel investor.
Related: 5 Things Angel Investors Want to Know Before Investing in Your Startup
What are angel investors?
The term “angel investor” is used to describe a private individual who provides capital to a startup company, usually in exchange for equity. These individuals rely on their own wealth to make investments, but this doesn’t necessarily mean they are exorbitantly wealthy. The actual amount of their investment can vary, depending on the company’s size, but they will be using their own money rather than an aggregation of funds from others.
Though not a requirement, most angel investors are accredited investors, which ensures they have the appropriate funds for investing. In recent years, some have used the term “angel investors” for high contributors in the crowdfunding sphere — i.e. someone who has donated thousands of dollars to product campaigns in exchange for part ownership.
Some people connect with angel investors via “angel groups” or established syndicates that connect startups with funding. There are even a number of websites devoted explicitly to connecting angel investors with potential businesses. But angel investors can also be friends, family or social connections generated on platforms such as LinkedIn.
Related: Where to Meet Angel Investors and How to Pitch Them When You Do
How they play a pivotal role
Unlike other forms of early funding, angel investors often play a unique and pivotal role in startups. Because they’re investing their personal wealth into a young business, you can expect angel investors to have a higher level of interest and involvement in the company. Whereas venture capitalist firms or banks may take a neutral stance towards your company, angel investors invest based on their passions and often due to a desire to see the company and its people flourish.
The potential drawbacks and benefits of angel investor funding
It’s risky to be an angel investor. They’re usually the first to fund a company, so they generally want equity in exchange for their investment. And as mentioned, they’re likely to be highly involved in the company’s development — so you’ll want to ensure that you see eye-to-eye with your angel investor(s) and agree on the company’s future. This will require quite a bit of preparation (and paperwork) on your end, which can also eat up a lot of time.
From the investor’s perspective, there are definite disadvantages to being an early investor in a startup. It can take years to see any sort of growth in the company, and future revenue is never guaranteed. This type of investment is by no means a “fast cash” option, but a long-term partnership.
Despite these drawbacks, early-stage angel investments still have plenty of benefits. The same passion and interest that may be a burden can also be beneficial advice for the development of your company. Angel investors often look for companies in a sphere they’re knowledgeable in, so it would be unwise to shrug off their experience. Their early involvement can also help get your company off the ground and put you in a position for more funding from VCs, especially if they already have connections in the industry.
For investors, there is the chance of long-term profit and future business opportunities, which aren’t available in later-stage investments. You’ll also be diversifying your portfolio with unique investments and the chance to make multiple investments over time. Plus, you’ll have the opportunity to share your business knowledge and guide the development of the company, rather than simply writing a check.
While angel investors aren’t the best funding fit for every startup out there, they can provide a unique resource of value and partnership hard to find through other capital investment options.
Related: 5 Reasons Why Angel Investing is Best For Small Businesses
The takeaway
If you’re looking to secure early-stage funding for your startup, angel investors are likely your go-to option. In recent years, they’ve become a crucial part of the startup lifecycle. However, this increase in angel investors has also meant increased competition. You’ll need to prepare the correct information to find and secure an angel investor.
A concise, clear presentation of your company and a defined exit strategy for the investor are important in securing early-stage investment. You’ll also want to know how much equity you’re willing to lose in exchange for early investment in your company and be prepared for a long-term business relationship with your angel investor.
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