What is an angel investor?
An angel investor is a high net worth individual (usually senior executives or successful entrepreneurs) who invest in early-stage startups. However, there are different types of angel investors like the well-known angel investor, the super angel, or groups of angels.
A couple of centuries ago, angel investors were the ones who invested in broadway musicals with no expectations of a return on their investment. That's why they are called angels!
Why are angel investors investing in startups?
There are many different reasons why an angel investor is investing in early-stage startups.
The main reason angel investors invest in early-stage startups is that they see a chance of earning a high return on their investment if the startup is sold to another company.
However, these chances aren't as high as some may assume. According to Investopedia, the failure rate of startups was around 90% in 2019. No wonder that angel investors diversify their investment portfolio by investing in not just only one startup, but investing into at least two or more.
An angel investor is always calculating with a failure of most of his startup investments in his portfolio. You may wonder why an investor is investing in them anyway? Well, there is a chance that at least one of his investments goes through the roof and "carries" all of the other failed investments.
In addition to filling the startup's coffers, an angel investor can also open particular doors for founders to accelerate their startups' growth, optimize margins or save marketing spendings by establishing partnerships with larger companies the investor is connected with.
The good thing for entrepreneurs is, that the investment of an angel investor is less risky than most other investment options in case of failing along the way. In that case, there is no need to pay back the investor.
However, an angel investment comes with the loss of some control of your startup. Since the investor risks losing all his money he usually wants to sit at your table and have a greater say in the way the startup is run.
On the other hand, angel investors will not be there talking to you daily. Yes, they will have a certain amount of control over where your startup is moving, but typically an angel investor is invested in more than one startup and does not have the time to tell you what steps your should take next.
But where can you find angel investors?
Well, the answer seems simple but we need to dive deeper into this topic: You can find angel investors offline and online!
There is a large number of online platforms like an angel.co, angelinvestmentnetworl.us, or LinkedIn where you can search for angel investors. I always recommend startups to at least create a profile on these pages to be findable by interested investors.
On these platforms, you typically find syndicates or groups of angels that could be of your interest. The reason why you most likely find angel groups on these platforms is of the angel's nature to prefer investing in groups instead of investing alone. By investing in groups angel investors gather their knowledge to make a better decision if an investment has a good chance to generate a high return and they cut the risk of losing their money into smaller bits.
From my experience, there is one major thing missing when looking online for a business angel: the introduction to a potential investor by someone who knows you AND the investor!
Having an introduction to an investor is worth a lot. The advance of trust you get gives you a huge advantage, not just in time but also in credibility. You have to know that since investors are highly successful entrepreneurs or executives their time is very strictly limited. Due to this, they spent very little time reading pitch decks or attending to pitch events. As you can see, the introduction to an investor is a massive shortcut you hardly find on an online platform.
Angel investor vs. Venture Capital
The main difference between an angel investor and venture capital is the timing of their investment. While angel investors are looking for startups that still are in their early stage but have the chance to become a huge company, venture capitals are more likely to look for later staged startups.
Good to know: The early-stage angel investment is called pre-seed or seed investment.
Another difference is the number of funds each of them is willing to invest. Angels are more likely to invest smaller amounts of funds. Something between 50k - 500k is the average investment size of an angel. Why is the average so "low" in comparison to the average of $11.7M of VC investment (According to the U.S. Small Business Administration)? This is because the earlier the investment takes place the higher the risk is for an angel to lose all his money. At that early-stage startups need to concentrate on the basics of building a successful company, which is not spending all their money on expensive CEO salaries, but to get some traction on social media, spend money on google ads and such to get a feeling for what works in marketing and what does not and to develop a great product that fits their potential customers.
In addition to that and already mentioned above, angel investors usually invest in more than just one startup to maximize their chances of getting a high ROI (return of investment) from at least one startup. Due to this, most angel investors follow the "small ticket sizes for as many startups as possible" investment strategy.
Another difference between angels and VCs is their internal structure. A business angel is a single person while VCs are syndicates of different investment companies or investors that decided to pool all their money and have it managed by a group of people.
If a VC is interested in investing in your startup you first have to pitch your idea to the investment manager who then, if he gives the green light, "allows" you to pitch in front of all members of the syndicate during a gathering. After your pitch, the member will decide if they are going to invest in your startup or not. I have gone through this process on my own and can tell you that it was a very exciting experience!
In contrast to this, meeting an angel is not as formal as meeting a VC. If an angel shows interest, you will probably send him your deck via mail or hand it out to him as a printed deck. He then reads the deck on his own and if he thinks you and your idea can turn his funds into more funds, he will contact you and make an appointment for a meeting. In this meeting, he will ask you a couple of questions to get to know you/your team, and your startup better before you both start negotiating the actual investment.