Angel investors are behind a large number of the financing of startups in Silicon Valley. Angel investors have funded numerous successful startups that have grown to the large cap ranks. Uber, Facebook, and Google are examples of startups that relied on wealthy benefactors to reach the behemoth status they have achieved today. If you are seeking financing for your new business venture, then pursuing seed capital from an angel might be the right path for you. You may be wondering what is an angel investor exactly?
What Is An Angel Investor?
An angel investor is a wealthy individual who provides the capital to fund an entrepreneur’s business ventures. In order to be an angel investor, you must be an accredited investor. An accredited investor is defined in the Securities and Exchange Commission Rule 501 of Regulation D as:
- (a) an individual who has earned income of over $200,000 per year for each of the previous two years and will meet that level for the current year or
- (b) has as net worth over $1 million dollars excluding the value of his/her primary residence.
Accredited investors earned income must total $300,000 or more if including a spouse and can also apply to any trust with assets of $5 million or more. The typical angel investor is a multimillionaire with significant assets.
Angel investors fund a variety of projects since startups are high-risk ventures with a great likelihood of failure. 60% of startups end in failure, which is why angel investors diversify their risk by seeding numerous early stage companies. It only takes on successful angel investment to more than make up for all of the failures. Investors are called angels because they provide necessary capital to startups that are unable to obtain financing from banks and other traditional lenders.
The funding of angel investors is a life-saver for early stage companies who benefit from the capital injection and advice of angel investors. Angel investors typically invest anywhere from $10,000 to $10,000,000 in each business startup they seed. This seed capital finances the growth, product development, and operating costs for small businesses.
Angel investors are long-term investors with most angel investments not yielding any returns for nine to ten years. Angels possess both the vision and patience to wait for their investments to mature. Super Angels like Peter Thiel and Marc Andressen have become famous by their shrewd investment selections. Angel investors differ from venture capitalists in that angel investors invest their own money whereas venture capitalists invest the money of other wealthy individuals.
The Benefits Of Angel Investing
Angel investors typically receive a return in one of two ways. Angel investors either receive payment in the form of equity or are holders of convertible debt. The convertible debt protects them in the event of default. If the company is successful, the debt is often converted into an equity stake. Angel investors love to be rewarded with an ownership stake in a company. The typical ownership stake is anywhere between 10 and 50 percent. Business owners are ceding a degree of control in the form of equity in exchange for financing. An ownership stake gives angel investors control over issues relating to board selection, corporate governance, and management.
Angel investing is incredibly lucrative for angel investors who pick the right start up to invest in. The right angel investment can take an investment in the low six figures and yield a return in the billions.
- Facebook was launched with a $500,000 investment by Peter Thiel in exchange for 10.2% of the company.
- Chris Sacca of Lowercase Capital invested $300,000 in Uber’s angel round which is now worth $1.9 billion dollars.
- Amazon’s Jeff Bezos made a $250,000 investment in Google which would be worth over $3 billion dollars today
As you can see, angel investing is a highly profitable venture. The right angel investment can elevate millionaires to billionaire status. This potential return on investment is what makes angel investors take the risk of investing in startup ventures despite the high failure rate. Angel investors are able to cash out of their stake with an initial public offering of stock or when a company gets bought out by a private equity company. Angel investing can set up a passive income stream that lasts a lifetime.
How Do You Locate Angel Investors?
Crunchbase has an Angel Investors list that gives you a list of more than 3,000 angel investors. You can access their investing activity, fundraising history, portfolio companies, funding rounds, amounts, acquisitions, exits, number of people, and angel events. You can use this information to tailor your pitch to the major angel investors. Some of the most successful angel investors on Crunchbase are Ron Conway, Fabrice Grinda, Paul Buckheit, Wei Guo, and David Tisch. Crunchbase is not free however with access to this information costing $29 per month.
You can also connect with angel investors on sites like Equitynet, Funded, AngelList, and Startengine. Angel investors pool their capital to finance startup proposals presented online. MicroVentures matches you with angel investors who invest in small startup businesses. These micro angel investors contribute a minimum of $100 in companies. Even celebrities like Ashton Kutcher have entered the lucrative angel investing arena seeding small startups from his own personal fortune.
While angel investing used to only be located in major coastal cities like San Francisco and New York; today you can find angel investors everywhere. You can locate angel investors in your hometown. Business professionals, doctors, lawyers, professors, CPA’s and other professionals are likely to be angel investors. There are angel groups in many cities who review deals on a monthly basis. Check with your local Chamber of Commerce for details on angels groups in your area.
Would you be interested in becoming an angel investor? Or would your business benefit from a capital infusion by an angel investor?