What is an Angel Investor?

An angel investor is a person who invests their own money in a new, private company to own a part of it. The company is usually a startup that could grow fast.

How Angel Investors Help Companies

Angel investors help these new companies in a few critical ways:

They give the company money it needs to get going. New companies need cash for office space, computers, and hiring workers. It’s hard for startups to get loans from banks. So, angel investors fill this gap.
Angel investors often have started companies before. They use this knowledge to help guide the new company. They might help the startup make big decisions or meet important people.
Having an angel investor support a startup makes other people take the startup seriously. It’s a big thumbs up. This can help the startup get more money from different investors or banks later.

How Angel Investors Make Money

Angel investors want their piece of the company to become more valuable. Here’s how that can happen:

The company gets bigger and earns more money. As an owner, the angel investor’s share is worth more.
Another giant company buys the startup. The angel investor makes money from this sale.
The company decides to sell parts of itself to the public. This is called an initial public offering or IPO. After an IPO, anyone can buy a piece of the company. Angel investors can sell their pieces for a lot more than they paid.

Of course, many startups fail. So, being an angel investor is risky. They could lose all their money if the company goes out of business.

How Does Angel Investing Work?

Now, let’s dive into more specifics of how the process works.

Finding Companies to Invest In

Angel investors often find young companies to invest in through their network. They might know the people starting the company, or they might know someone who knows them. Some angel investors focus on certain types of companies, like new tech companies or companies in their hometowns.

There are also online platforms that connect angel investors with startups seeking money. The startup makes a pitch on the platform, and interested angels can learn more.

Deciding to Invest

Before investing, angels research to decide if a company is wise. They might:

Look deeply into what the company does, its plans, and how much money it could make.
Learn about the people running the company. Do they seem honest, hardworking, and knowledgeable?
Think about the market. Is it a good time for this type of company? Are people likely to buy what it’s selling?
Consider the terms of the investment. How much of the company will they own? What say will they have in big decisions?

This process is called due diligence. It helps the angel decide if the company is worth the risk.

Putting in the Money

If everything looks good, the angel investor and the company sign a contract. The contract states how much money the angel is investing and what chunk of the company they now own.

Often, angels don’t just hand over a big check. The money comes in stages. The company gets some money in the beginning. To get the rest, you have to hit specific goals. This motivates the startup to use the angel’s money wisely.

What Makes Angel Investors Special?

Angel investors have some unique traits. Here’s what sets them apart from other types of investors.

They Use Their Own Money

Angel investors don’t invest someone else’s money—it’s cash straight from their bank accounts. This differentiates them from venture capital firms, which pool money from many investors to fund startups.

Because it’s their money, angels can decide to invest faster than VCs. However, this also means most angel investments are smaller—usually a few hundred thousand dollars, while VCs can invest millions.

They Take Big Risks

Angel investors bet on very young, unproven companies. Maybe the company has just an idea and a couple of passionate founders. Most of these super-young startups fail, and angels know that going in.

Since the risk is so high, angels often invest in many startups. They hope a few big wins make up for the failures.

They Offer More Than Just Money

Many angel investors are successful businesspeople who have started and run companies. Some have extensive knowledge about a particular industry, like software or health care.

These experiences make angels valuable advisors. They can help a young company avoid mistakes, connect with influential people, and think through challenging problems. This kind of support can be as important as the money they invest.

They Invest Where VCs Won’t

Venture capital firms tend to invest in startups a bit later. The companies have already shown some growth and progress.

Angels fill an essential gap. They fund companies that are too young and risky for VCs. Without angels, many great companies would never get off the ground.

The Key Things to Know

So, in a nutshell, here’s what you should remember about angel investors:

They’re individuals who invest their own money into very young, private companies.
They do it to own a chunk of the company, which they hope will become more valuable.
It’s risky. Many startups fail, but angels can make much money if a company takes off.
Angel money helps startups hire people, create products, and grow when banks don’t lend to them.
Angels often provide advice and connections, not just cash. Their business know-how can help a startup.
Most angel investments are in the hundreds of thousands of dollars range.
Angels fill a gap, funding companies too young and risky for venture capital firms.