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Everything You Need To Know About Angel Investors

This article will explain exactly what an angel investor is, the different types of angel investors, and where to find angel investors.

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What is an angel investor?

An angel investor is typically a high net worth individual that invests in a new or small business, providing capital in exchange for equity in the company. Additionally, since the JOBS Act, angel investing has expanded and individuals, regardless of their annual income, can participate in equity crowdfunding.

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Photo source: Angel investors vs venture capitalists (Xero)

They may invest as early as when a business is merely a concept, or after the company has proven to have some traction. Frequently angel investors are from an entrepreneur’s network.

Since angel investments are typically risky investments, investors look for a return of 25% or more when investing in a company. Angel investments usually don’t represent more than 10% of the angel investor’s portfolio.

Angel investors also are known to provide more favorable terms in comparison to other lenders like venture capitalists, since they are typically investing in getting a business venture off the ground rather than in its profitability.

Who can be an angel investor?

Angel investors typically have gained accredited investor status, but it is not a requirement. The Securities and Exchange Commission defines an “accredited investor” as one with a net worth of $1 million in assets or more (excluding personal residences), or having earned $200k in income for the previous 2 years, or having a combined income of $300k for married couples (source).

What are the different types of angel investors?

There are typically five different angel investor types:

1. The family and friends investor

The family and friend investor knows you personally. Their motivation comes from supporting a friend or family member and are typically the first to write a check. Since this type of investment is emotional and personal, family investments work best if everyone comes into the situation with “their eyes wide open.”

Family investors will also typically not have much of a value-add and may needlessly interject into operations that may be difficult later on in the company’s growth.

2. The business friend investor

Also known as the previous-colleague angel, the business-friend investor can be a strong validator to future investors and can vouch for the entrepreneur’s work.

Not only can they speak to their experience working with you, but this investor can also be incredibly supportive and helpful to find resources and employees for the company; however, may not act as much of a value add after the first rounds of financing.

3. The domain investor

This investor has specific deep knowledge of your particular industry or category. They are usually operating executives who’ve spent their entire career in a specific vertical. This industry-insider is a great validator for future investors but may be a bit over-eager to share uninvited advice.

4. The once-removed investor

An entrepreneur will typically be connected to a once-removed investor through a colleague or personal relationship. These investors likely don’t know who you are or are familiar with your idea.It’s typically hard to get them on board without additional angel investors already bought into your idea

5. The super angel investor

Also known as an “Archangel Investor,” these are angel investors with a track record for successful and numerous investments. They typically are part of a large venture capital community and are a great value add to your network, particularly if you plan to continue raising venture capital. A potential con may be that they are very busy with other investments and may not be able to be as involved as other angel investors.

Generally, you want to aim for an angel funding round that has a mix of the family investor, the business-friend investor, and the domain investor plus some once removed investors (source).

Spend your time and resources looking for relationship investors or idea investors to bridge you and your company to the next round of funding.

What should you ask angel investors once you secure a meeting?

Make sure you understand the potential investor’s partnership style. Ask an angel investor questions like:

  • Do you have any references from other entrepreneurs you’ve worked with?
  • What is your involvement process like for your investments?
  • How do you think you can help us grow our business?
  • What are your other investments in our industry?

Where do I find angel investors?

First and foremost, search through your network or your friend’s n etworks angel investors to find those friends and family angels as well as the one-removed angels.

However, if you are looking to augment your funding round with an industry expert or bring on board a super angel, you may need to do more due diligence. You can search Crunchbase for investors and add them to a list with Crunchbase Pro.

Filter potential angel investors by location, exit count, a category they’ve invested in, or by CB Rank. Here are some searches for angel investors to get you started:

A great way to approach these investors is to ask for feedback for your concept, rather than asking for money right off the bat. Few investors will write you a check after just an initial meeting.

Also, be sure to join the waitlist for Crunchbase Connect and automatically get matched with investors that are right for your company and go beyond your personal network.