By definition, angel investors are affluent individuals who have the means to invest large sums of money in early-stage companies in exchange for convertible debt or equity. They typically must meet the Security Exchange Commission’s definition of an accredited investor and hold over $1 Million in liquid assets.
Angel investors are becoming increasingly important in the entrepreneurial ecosystem. They now provide 90% of outside equity for early-stage companies and the Angel Capital Association estimates that there are about 300,000 active angel investors who have made an investment in the last two years. With the rise of angel groups and the decline in investments being made by VC firms, angel investors are beginning to fund companies across longer periods in their growth cycle. Smart entrepreneurs are building their angel networks early and learning where and how to engage these kinds of investors. In order to successfully riase from angels you need to know: what is an angel investor, how do they think about thier investments, and what are they looking for from entrepreneurs.
Profile of an angel investor
Angel investors are hugely important to the entrepreneurial ecosystem and provide 90% of outside equity for early-stage companies. The Angel Capital Association estimates that there are about 300,000 active angel investors who have made an investment in the last two years.
Contrary to popular belief, not every wealthy person is an angel investor. There are an estimated 12.4 million households in the U.S. that qualify as accredited based on the SEC definition. So, of the total number of people in this country who theoretically have enough income to do some risky early-stage investing, less than 2.5% of them actually consider themselves angel investors.
Why? Honestly, many of them just don’t know how, that is why so many angel groups are forming and becoming popular. Investing in early-stage companies is extremely risky, and good angels are comfortable with those risks. Just because a person has the money doesn’t mean they find it easy to write a $25,000 check to an entrepreneur who is most likely going to lose it. This the sad, but true reality about entrepreneurial endeavors.
The good news for entrepreneurs is that angel investing is gaining in popularity, and the rise of angel groups is providing more and more individuals the confidence to invest in early-stage companies.
Some common characteristics of angel investors:
- They are often entrepreneurs who have had a successful exit or retired business professionals who want to help new businesses succeed.
- They are accredited investors.
- They invest their own money (less than 10% of their wealth), and are not money managers for other people.
- Generally, they invest in local companies because they want to support businesses in their community.
- They are often time-poor; angel investing is usually a part-time activity.
Angel investors are sophisticated and understand the risks of investing in early-stage companies. I can almost guarantee that any angel investor who gives you money knows full well that you have a high likelihood of failure. And that’s a good thing. You never want to take money from someone who doesn’t understand the risks and who may be in bad shape if you don’t deliver.
Angel investors are usually men. Only a tiny percentage of my investors over the years have been women. The good news is that one in four angel-funded companies are women-led, so the fact that most angel investors are men has not been detrimental to female founders. I also know that more and more women are getting into angel investing, so the ratios are changing. The next step is to increase the number of women-led VC-backed companies, but that’s a topic for another day.
Angel investors think about investing as a portfolio-diversification strategy—they’re likely to invest a set amount of money per year and per deal. For example, an angel may invest $25,000 into four deals per year. Active angel investors are typically invested in at least 10-30 deals at a time, but only make 2-5 investments per year.
Is it possible you’re going to find an angel investor who can write you a check for your entire round in one fell swoop? Yes, definitely. Are they likely to do it? No, almost never. I always smile when entrepreneurs tell me they’re meeting a billionaire who could easily write them a $1 million check. I smile because I’ve said it myself, and I can count on one hand the number of $250,000 checks I’ve received from a single individual.
It’s important to understand the following about angel investors:
Timing is a huge factor, and it is usually beyond your control. In our first round we were having trouble getting our first big commitment when our lead angel sold his business and was in a perfect position to write a big check. It might be tax season, they may have just bought a house, or invested in two other deals. You can ask prospective angel investors about timing and their recent deals to get a feel for whether the timing is right—or wrong—for your deal.
They don’t like to invest alone or be the first one to invest. Angels do not have a lot of time to do diligence, and they feel more comfortable when other people invest in the same deals—a big reason angel groups are so popular. In the same way you need confidence to raise money, angels need confidence when it comes to making investment decisions. It’s usually a big investment for them, so they worry about making the wrong decision.
They like to invest in what they know. Finding at least your first few investors in a relevant sector gives other angels a lot of confidence. It really helps when someone who is knowledgeable about your market invests and can then say with confidence that there is market need, the idea is good, and the team is strong.
They really love results. The number one thing you can do to endear angel investors to you is to take their money and actually deliver results in terms of revenue and growth. I know that sounds obvious, but I also know firsthand how easy it is to raise $1 million and spend it all before getting to revenue. I can promise you that if you raise a small round and then prove that you can grow your business, your angels will be much more likely to help you with your next round and start telling their friends.
This post does a great job of describing how angels think about investing. In terms of what they are actually looking for, two things stand out for me and they are true for all investors, not just angels:
- Investors want to know you are committed. They want to know that you are going to do everything you can to give them a return on their money and not give up when the going gets tough.
- Investors want to see that you have traction—in revenue, product, and your investment round.
Hopefully, that gives you some guidance as to who angel investors are so you can be better prepared as you try to engage them and close deals. If you’re heading out on the fundraising trail, our CEO, Krista Morgan put together a free ebook called Raise Your Round: An Entrepreneur’s Guide to Finding Investors, Closing the Deal, and Engaging Your Angels. It’s a step-by-step guide that will walk you through everything you need to know about raising from investors. Get your free copy here. We’d love to hear any feedback on your personal experiences finding angel investors. Please share your thoughts in the comment section below!