What Are Angel Investors and What Do They Do?

What Are Angel Investors and What Do They Do?

Stumbled upon a creative business idea? Maybe you want to watch over it like a guardian angel. Or maybe you want to attract an angel investor to lead your first seed round. Whatever the scenario, this article takes a closer look at angel investors. So, sit back, relax and enjoy the read.

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Angel Investor Profiling

Also known as “seed” investors, these trailblazing visionaries are affluent individuals who invest part of their capital in start-ups and receive an ownership stake for their contribution. Typically, angel investors contribute up to 90% of the outside funds raised by start-ups, according to data from Angel Capital Association, the world's leading development organisation for angel professionals.

Entrepreneurs bank on the support of angel investors (pun intended) to make their business soar. Angel investors are, most of the time, successful entrepreneurs themselves, and can bring a wealth of expertise to a business, not just their investment.

In addition to watching over start-ups and driving them to the top, angel investors also want to see their investment grow and pay off a hefty profit share further down the line. This means they will always keep a weather eye on the start-up's operations and even be involved in decision-making to ascertain their investment is used diligently.

What do angel investors do?

As high and ultra-high-net-worth individuals fuelling staggering amounts into start-ups, angel investors are also exposing themselves to greater risk than investing in the public equity markets.

Generally, angel investors finance businesses in their early stage of development, before they start generating revenue. Instead, they have a robust business plan and will have created a rough draft of their product and/or a beta test. Angel investor funding is used for research and development to help the company build its product and a comprehensive service offering, formulate a business strategy and identify its target market.

As the business scales its operations, production and marketing, venture capitalists may emerge at this stage to lead the next round of seed funding and help the company expand further. In this sense, they distinguish themselves from angel investors who nurture start-ups in their “nest egg” phase. We will expand on these differences later. Meanwhile, let's carry on with our angel investing “lesson” and how to become one.

There is no set minimum or maximum investment size to become an angel investor. It can vary between a few thousand to millions of pounds, it depends on the opportunity at hand. Start-ups may offer angel investors shares or the right to buy them at a later stage. Whatever the case, angel investment may come in the form of a one-time hefty contribution or ongoing capital injections, depending on the company's needs.

How do you become an angel investor?

Having the money and the start-up to finance does not make you an angel investor, you must be qualified. The prerequisite to becoming an angel investor is to be accredited, which means that you have to meet certain criteria. For example, your earnings must be at least £200,000 consistently, for the last two years, or £300,000, with a partner or spouse, or your net worth, alone or with a partner, must exceed £1 million in investable assets.

You may ask yourself “Why these limitations?” Angel investments are deemed high-risk, and accredited investors possess the financial arsenal to launch a business on its growth path. Some start-ups may accept investments only from accredited investors, while others may also accept funding from non-accredited “angels.”

What do you need to look for in a start-up?

Angel investors are usually part of a network including start-up founders and entrepreneurs in their industry or area of expertise. Frequently interacting with these contacts, angel investors learn about potential good deals to finance.

As a rule, they cherry-pick those that have a viable value proposition and a clear business plan. Most importantly, angel investors look at ROI. “How much return on investment will business X generate in the long term? What's in it for me?” This is where start-up founders must get creative and resourceful if they want to make investors open their deep purses.

Next, as an investor, you will want to get to know the start-up founders and ensure they have the skills, experience, and personality to enact their ambitious vision (and translate it into millions-worth returns).

Business presence and reputation are also vital, as they will give investors an idea of how the company positions itself within its industry and how well is regarded by its clients and peers. A start-up that has already gained some traction beyond its immediate circle of founders and business partners tends to weigh significantly in the eyes of angel investors.

However, even the most astute investors can fail, just as businesses can fail. So, you must be aware of the risks involved. Keep reading as we reveal them here.

Be aware of the risks

We said before that angel investing is a risky venture, as the business or businesses you finance have not proved their worth yet. FundersClub, an online investing forum for start-ups, suggests that 75% to 90% of start-ups fail, and many angel investors lose their entire investment. To prevent that from happening to you, it's best to:

Study the finances and business plan of the start-up you want to support. Thoroughly.

Get to know the founders and understand their vision.

Spread your risk by investing in multiple start-ups. One of them must succeed, right? Especially with your guidance as an angel investor. But how much should you get involved in the start-up's affairs? Should you get involved at all or sit back, enjoy the view, and watch your account balance grow? Food for thought…

Meanwhile, keep an eye on FundMyPitch as we have a lot more to cover in the angel investing and start-up areas. Stay tuned!