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Funding 101: Prep

 

What are Angel Investors?

Angel Investors are typically high net worth individuals who invest very early into the formation of a new startup company. The role of angel investors serves as a critical bridge between the startup financing needs of a company and their larger capital needs later on.

First Money Into the Deal

After you get your initial friends and family funding, Angel Investors are the first checks written by “outside” investors in a company. They tend to be the first professional capital into a deal, but they are also looking to trade the risk of being in early with the reward of getting more equity (stock).

Later on as the company gets larger and their capital needs are greater, the amount of money an angel can invest doesn’t yield a very big percentage of the company, so effectively their money becomes less valuable. This is why angels are so consistently found early in a company’s formation.

Typical Deal Sizes

Angel Investors can invest as much as their wallets will support, but a their typical check sizes will be less than $500,000 in most deals, and can be as little as $5,000 depending on the opportunity.

As you start to cross the $500,000 mark, or even near that mark, you begin to get into a situation where angels will band together with other angels (sometimes in an Angel Investor Group) to help spread the risk across numerous investors.

They are “Investors”, not “Angels”

With a name like “angel’ there’s sometimes an expectation that these investors are looking to make charitable investments. That’s entirely not the case.

Angel investors are regular people just like you, albeit probably with more money. But they want to get a return on their investment like anyone else. If your company is losing tons of money or is in a terrible financial position, they don’t want to bail you out. They are not there to save you – they are there to make money.

These investors may look to take a chance on your idea, but they are only going to so if you are extremely well prepared. They don’t just hear an idea and decide to write a check. Anyone walking around with a check book in hand that has money to spend is getting pitched non-stop by people to write a check. Instead, they want people that represent a solid investment that they can feel confident will make a return.

Types of Deals Business Angels Invest In

Business angels tends to invest in companies that are in industries they know a lot about. If an angel investor made a lot of money in the real estate industry, you can imagine they would be most comfortable putting money back into that industry since they are going to be most confident in what to expect.

That’s not to say that it’s the only criteria for angel investors. They may have made their money in gold mining but are looking to make investments in Internet companies because they think that’s where the big upside opportunity is. While you wouldn’t want to count out an angel investor who didn’t come from your industry, you would definitely want to seek out those who might have a built-in affinity to your industry first.

How they Fit into the Investing Landscape

Angel investors (especially well known Angels), add a tremendous amount of credibility to a deal when you go to raise Venture Capital. When venture capitalists see that others have put money into your deal, it gives social proof to your team and venture. Additionally, most angels bring much more to the table than just money for a deal. They can bring contacts, management advice, and industry knowledge to a deal to help fast track your startup forward.

Angel Investor Statistics

Angel investors accounted for over $20.1 billion in investments into nearly 62,000 companies in 2010. This accounted for an average investment of about $325,000 into these companies. The Center for Venture Research estimates the number of active angel investors to be 258,000. This is a far larger number than those that belong to angel groups (only 35,000 belong to local angel groups).

Individual Angel Investors

Steve Baker - Accredited Angel Investor in San Francisco, CA

Dean Anthony - Accredited Angel Investor in Wellington, FL

Jason White - Accredited Angel Investor in Jackson Heights, NY

Bill Smarts - Accredited Angel Investor in New York, NY

John Nichols - Accredited Angel Investor in Orlando, FL

James Boyd - Accredited Angel Investor in Patchogue, NY

View More Accredited Angel Investors here.