Who are Angel Investors?
The term ‘Angel Investor,’ or ‘Angel,’ refers to anyone who invests his or her own money in an entrepreneurial business – unlike a venture capitalist, who invests other people's money.
Angels differ from bank lenders, VC firms and private equity companies in some significant ways. First, they may not be solely motivated by profit. Particularly if an angel is an entrepreneur, he or she may be motivated as much by the enjoyment of helping a young business succeed as by the money he or she stands to gain. Second, angels are more likely to take a chance on a start-up venture. Bank lenders tend to pass up businesses without at least three years of financial records. Third, angels are more likely than bankers or venture capitalists to be persuaded by an entrepreneur's level of motivation and persistence. Because most angel investments take place between investors and entrepreneurs who already have a relationship, a good reputation can go a long way.
That being said, angels do seek a higher rate of return than traditional investments. In exchange for bypassing a lower-risk investment, like a stock, bond or index fund, for a higher-risk entrepreneurial opportunity, angels do want higher levels of returns and compensation. Moreover, they generally have the same criteria as venture capitalists and private equity firms. To pass a first screen, you must have a strong management team in place, intellectual property protection (if applicable), significant market opportunity and, of course, a well-developed business plan.
Angels typically invest between $300,000 to $5 million. They tend to fill the void between venture capitalists (generally interested in deals exceeding $5 million) and limited investments by friends and family.
Contrary to the lofty-sounding name, angels are often not hard to find. In your own community, they can include professionals such as doctors, lawyers or business executives. Successful entrepreneurs also make good angel investors. Successful entrepreneurs in your industry, however, make excellent angel investors, as they can provide much more than funding.
Finally, angel investment groups or networks are excellent sources of funding. These tend to focus on high-tech ventures, so entrepreneurs may need to invest time in finding the right one. Start by looking for an angel group in your area. Check out Inc.com’s Directory of Angel-Investor Networks at http://www.inc.com/articles/2001/09/23461.html.
