What Is an Angel Investor?

An angel investor (also known as a private investor, seed investor, or angel funder). He/she is a wealthy individual who provides financial support to small businesses or entrepreneurs in exchange for ownership equity in the company. 

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Angel investors are frequently found among an entrepreneur’s family and friends. Angel investors’ funds may be a one-time investment to help the business get off the ground. Or they may be a continuous injection to support and carry the company through its difficult early stages.

Key Takeaways

  • An angel investor is typically a high-net-worth individual who invests in startups early on, often with their own money
  • Angel investing is frequently the primary source of funding for many startups, who prefer it to other, more predatory forms of funding
  • Angel investors’ assistance to startups promotes innovation, which leads to economic growth
  • These types of investments are risky and should not account for more than 10% of an angel investor’s portfolio.

Understanding Angel Investors

Angel investors are individuals who seek to invest in startups in their early stages. These types of investments are risky and should not account for more than 10% of an angel investor’s portfolio. Most angel investors have excess funds and are looking for a higher rate of return than traditional investment opportunities provide.

Angel investors offer better terms than other lenders. Because they typically invest in the entrepreneur starting the business rather than the viability of the business. Angel investors are more concerned with assisting startups in taking their first steps than with the potential profit from the business. Angel investors are the polar opposite of venture capitalists.

These are typically wealthy individuals who invest capital in startups in exchange for ownership equity or convertible debt.

Some angel investors invest through online crowdfunding platforms or form angel investor networks to pool capital.

Origins of Angel Investors

The term “angel” originated in the Broadway theatre, where wealthy individuals contributed funds to propel theatrical productions. 

William Wetzel, founder of the Center for Venture Research at the University of New Hampshire, coined the term “angel investor.” Wetzel finished a study on how entrepreneurs raise capital. 

Who Can Be an Angel Investor?

Angel investors are typically individuals who have achieved “accredited investor” status, though this is not required. 

Essentially, these individuals have both the financial means and the desire to provide startup funding. This is welcomed by cash-strapped startups, who find angel investors far more appealing than other, predatory forms of funding.

Sources of Funding

Unlike venture capitalists, angel investors typically use their own money. Whereas venture capitalists manage a pooled pool of money from many other investors and place it in a strategically managed fund.

Though angel investors are typically individuals, the entity providing the funds may be a limited liability company (LLC). A business, a trust, or an investment fund, among many other options.

Investment Profile

Angel investors who seed startups that fail in their early stages lose their entire investment. This is why professional angel investors seek opportunities with a clear exit strategy, such as acquisitions or initial public offerings (IPOs).

As a result, angel investments are ideal for entrepreneurs who are still struggling financially during the startup phase of their business. Learn more about take home salary calculator India