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Angel investing is a way to raise capital without incurring any debt. Instead of obtaining money from a lending institution, you get it from an individual who then takes on a share of ownership of your company. Having an angel investor certainly sounds like a sweet deal, and many successful businesses got their start that way. But there are some things you should know before you seek out an angel investor for your business. Recommended: 10 Steps for Starting a Small BusinessWhat Is an Angel Investor?
An angel investor is an individual with a high net worth who lends money to new small businesses and start-ups in exchange for equity. While they do not have to be accredited investors, many are. Many businesses get angel funding before they’ve even launched, and it may come from people who were once new entrepreneurs themselves. Most likely, they’ve since become quite successful and want to further their success by investing in promising up and coming companies.While some angel investors work by themselves, many operate in a group, which is often the better choice for someone looking for funding. With a group of angel investors you get the experience of multiple experienced business owners as opposed to just one. Should your business fail, the loss will be shared among the group instead of falling on the shoulders of one single investor. What Does an Angel Investor Look Like?
Many angel investors are accredited investors. To be accredited, they must make at least $200,000 a year, have a net worth of $1 million or more, or hold a relevant license. However, an angel investor can literally be anyone. This means the money needed to start a business can come from: - Family members
- Friends
- Work associates
- Neighbors
- Strangers who support your vision
Some angel investors may make only a one-time investment of a few thousand dollars, while others may make ongoing contributions to help a new business with its capital needs. It’s not unheard of for an angel investor to contribute millions of dollars to a startup. Because investing in startups is risky business, financial experts recommend working only with accredited investors. Many businesses fail each year, so it’s paramount that an investor not be financially crippled should a business venture in which they’ve invested fail. What Are the Pros and Cons of Angel Investors?
| Pros of Angel Investors | Cons of Angel Investors |
|---|
| Accept more risk than traditional lenders | May expect bigger growth and profits than are reasonable |
| Understand business and growth much better than a bank | May pressure you to make decisions you’re uncomfortable with |
| Will invest in an idea more readily than a traditional bank will | May try to run your business with you |
| Angel funding is not a loan with debt | May cease delivering funds if they don’t like the direction your business is going |
| Often comes with mentorship and guidance | May want a high percentage of equity |
Pros of Angel investors
Angel investors are quite different from a traditional lender. They don’t care about your credit score or financial status. They’re not concerned with how much equity you have in your house. The only things that interest them are, typically, your business plan and your ability to execute and bring in returns. Therefore, while a traditional lender wants to see things like collateral and a positive history with credit, an angel investor just wants to know what your idea is and how much you need to make your vision come to life. Even if it’s something unconventional like a lean startup, you may have success with an angel investor who understands what you’re trying to do. Because many angel investors were once running startups themselves, they are often more forgiving of any setbacks that may occur and may even be able to mentor you through rough waters. This perhaps is the greatest gift angel investors offer: free one-on-one lessons in business and how to survive tough economic situations. Cons of Angel Investors
There are many startup funding options besides angel investors. While angel funding is not debt with interest, it can almost be worse depending on the investor— meaning the interest that comes with small business loans can pale in comparison to the return angel investors expect. If you can’t deliver, the money may stop, and you may be pressured to make decisions you wouldn’t normally. It’s also possible the investor may even try to micromanage you and your business. Legally, the business will still be yours, but it won’t feel that way. When you accept money from an angel investor, you are selling a percentage of your company. There isn’t a set amount business owners are expected to give up in exchange for capital, but the average tends to be around 20%. This is too much for many business owners to give up, especially when they feel they’re creating the next big thing. The argument for getting an angel investment anyway, though, is that 80% of a successful business is a lot better than 100% of an unsuccessful one. In the end, you may want to consider business loans for startups before giving up any equity. Though you will have some debt with a business loan, every dime you make will be yours, and you’ll have a fixed monthly payment that doesn’t come with any strings attached. How Do You Find Angel Investors?
Knowing how to find an angel investor can be the first step to getting your business the funding it needs. Luckily, you should be able to pitch to both online and local investors. You just have to know where to look. Websites to Connect with Angel Investors
There are numerous angel websites online, and many have very specific missions. For example, Republic was made to help small retail businesses get off the ground, while Golden Seeds was created to help women entrepreneurs establish successful businesses. Here are some of the more popular websites for angel investors. - Angel Forum Society. This nonprofit foundation connects its angel investor members with tech startups.
- AngelList Venture. This group helps connect angel investors and startups, including one of its first, Uber.
- Angel Investment Network USA. This network connects entrepreneurs and angel investors.
- Angel Capital Association. This is a collective of accredited angel investors interested in early stage businesses.
- Envestors. The UK platform is meant for angel investors and entrepreneurs.
- Funded. This platform connects entrepreneurs and angel investors (as well as other kinds of investors).
- Golden Seeds. This organization connects its networks of investors (angel and otherwise) with promising women-led businesses.
- Gust. This is a platform for founding, operating, and investing (angel and other) in early-stage scalable enterprises.
- Life Science Angels. These angel investors are dedicated to funding startups that are making advances in healthcare discovery or delivery.
- Republic. This organization curates startups, gaming, real estate, and crypto opportunities for angel (and other) investors.
- SeedInvest. An equity crowdfunding platform, it vets companies for angel (and other) investors.
- Tech Coast Angels. This southern California-based angel investor nonprofit identifies, mentors, and funds early-stage innovative companies.
- WeFunder. This organization lets angel investors invest as little as $100 in startups they believe in.
Tips for Networking With Investors
To network with local investors, the best thing you can do is to become immersed in your local community. Become friends with other small business owners. Join online small business groups for your area. If there is a local trade organization, join it and go to every meeting. If your city or county has any trade fairs, make sure you attend those as well. Next, visit your local business development or economic development centers and ask if there are any angel investors or angel networks in your area. It’s quite possible that a community outreach coordinator may be able to point you in the direction you need to go. In fact, a network may even meet regularly in one of those community centers. After you’ve shaken hands with other entrepreneurs in your area, you could potentially find all of the funding you need without having to visit any of the websites above. Alternatives to Angel Investment Funding
There are many alternatives to angel investing. While loans are a form of debt, they don’t include selling a portion of your business. In the end, sacrificing 20% of your business could cost you a lot more than a loan ever would. At Lantern by SoFi, we make it easy for business owners to shop for small business loans. Search for loans for startups, or even loans for equipment. The Takeaway
Angel investors provide funds to startups, but there can be hidden costs. If you decide that this isn’t the right route for your company to get funding, there are other options Find the right type of financing for your small business with Lantern by SoFi.
Photo credit: iStock/kupicoo
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About the Author
Lauren Ward
Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
