Who Are Angel Investors and Why Do SMBs Need Them?

Lisa_Shettle
edited February 5 in Business

Who Are Angel Investors?

In simple terms, angel investors are individuals who provide capital to early-stage startups in exchange for equity. Angel investors are often former business leaders or executives who are willing to use their own money to help promising new ventures get off the ground. Sometimes this comes in the form of a one-time financial contribution, while other times recurring payments are made to support a company as it develops. In addition to money, many angel investors also offer mentorship and connections to help take a startup to the next level.

How Does Angel Investing Work?

Angel investing usually takes place during the seed or fundraising stage of a startup’s development. While the specific terms vary, most angel investments offer anywhere from $10,000 to a few million dollars in exchange for no more than a 25% stake in the company. Angel investors also typically look for a return of at least 10 times their original investment within five years, to be realized when the company is either acquired or launches an initial public offering (IPO).

Most angel investments take place after a startup’s initial funding round, but before they are big enough to be of interest to venture capitalists. While there’s no single way to secure an angel investment, most are established via the following process:

1. Networking

Angel investors and startups alike need to network to find investment opportunities. This can include everything from joining online angel investment groups to participating in pitch competitions.

2. Screening

Once a potential connection has been made, both parties need to do their due diligence. Investors may evaluate company records and industry trends, while startup founders can investigate the angel’s professional reputation.

3. Pitching

The startup founder then needs to make a formal pitch to the investors, which is typically a short presentation outlining the company’s financial needs and long-term goals.

4. Negotiating

If the investors like the pitch, they can start negotiating the terms of their investment deal with the founder. Terms to be decided may include investor’s rights, exit strategy, and equity stake.

5. Closing

After the deal is settled, lawyers for each party must prepare and file the final documents before money can change hands, at which point the deal is officially closed.

How Are Angel Investors Different from Other Types of Investors?

A successful angel investment ends with the investor exiting the company as it either gets acquired or launches an IPO. This is not only because the angel needs a return on their investment, but also because the company’s funding needs become too big for an individual investor. As companies grow and their financial needs change, they can partner with other types of investors who have access to more capital, namely venture capitalists and private equity firms.

Unlike business angels who invest their own wealth, venture capitalists manage funds from institutional investors. As a result, they can offer an average of $7.9 million per deal in exchange for a proverbial seat at the table. To protect their client’s interests, venture capitalists have a hand in hiring the company’s senior leadership and determining their business strategy. They also take far fewer risks than angel investors, spending up to $50,000 on due diligence before committing to potential investment prospects.

Conversely, private equity firms take more risks and expect higher returns on their investments. Using money raised from individuals, institutional investors, and pension funds, private equity firms acquire mature but stagnant businesses, reorganize them, and sell them for a profit. Since they are pooling money from several large-scale investors, private equity firms can have anywhere from a few million to billions of dollars to work with, and on average they earn an 11% annual return.

How Do Startups and SMBs Benefit from Angel Investors?

Venture capital and private equity investments are often out of reach for startups and small and medium-sized businesses (SMBs). Angel investors, on the other hand, are typically focused on supporting small and early-stage companies and are willing to take on the risks of doing so.

While they may offer lower dollar amounts, angel investors provide mentorship and invaluable access to industry contacts. They also allow founders to take their companies to the next level while still maintaining majority ownership. This includes providing funding for new technology that will optimize performance, with products like Acer’s TravelMate P2 16 laptops and Veriton 6000/4000 Mini business desktops.

Additionally, a Harvard report by William R. Kerr, Josh Lerner, and Antoinette Schoar shows that startups with funding from angel investors are more likely to succeed than other businesses. The report also shows how angel funding can contribute to increased website traffic, more successful outside fundraising, and better survival rates.

Where Can Startups and SMBs Find Angel Investors?

Startups and SMBs can find angel investors in a variety of ways, ranging from networking to incubator programs. There are also many organizations dedicated to supporting angel investing, including:

AngelList

AngelList is a platform designed to help tech-oriented companies find investors and raise money. It also has a directory for businesses to use to increase their visibility.

Angel Forum

Angel Forum hosts networking events, workshops, and online courses, all intended to help build strong investor-founder relationships.

Angel Investment Network

The Angel Investment Network has a website where entrepreneurs can post investment opportunities for a wide audience of angels to review.

Angel Capital Association

The Angel Capital Association works to advocate for public policies that benefit angel investing activity. It also offers a variety of events and educational opportunities.

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About Lisa Shettle: Lisa is a writer, editor, and content product manager with over 15 years of experience. She has a special interest in travel and tech writing, marketing, and AI. She is based in the United States.

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