An angel investor is an individual who uses their own personal capital to invest in a private company.
Angel investors most commonly invest in very young startups, writing checks that can range from a few thousand dollars to a few million. They are often the source of a startup’s first outside capital. Angel investments in a startup can take the form of equity or convertible debt.
Venture capitalist vs. angel investor
Angel investors, also called angels, are one of several potential sources of funding for early-stage startups. The most common type of investor in startups is a venture capital firm (VC). The main difference between angels and VCs is that angels invest their own money on their own behalf, while VCs primarily invest capital on behalf of their limited partners, or LPs. These LPs pool their money into an investment fund that’s managed and deployed by the VC.
Angel investors also tend to invest at the very earliest stages, where check sizes are smaller. There are some VC firms that also specialize in these smaller, early-stage deals. However, in general, VCs tend to write larger checks and invest in more-mature companies than angels.
Who are angel investors?
Angel investors can come from many different backgrounds. Most commonly, angel investors are current or former entrepreneurs, executives, or professional investors with expertise and past success in the industry or industries where they choose to invest. Angles are often high-net-worth individuals.
For startups, that expertise and past success is part of the appeal of working with angel investors. In addition to supplying capital, angels often provide some degree of strategic guidance and mentoring, as well as access to their networks.
While most angels are accredited investors (a distinction set by the Securities and Exchange Commission), they are not required to be. Angels often possess the capital and expertise to be professional investors, but they might lack the desire or the available time to pursue it as a full-time job.
What is an angel syndicate?
Sometimes, angel investors band together and pool their personal capital through a group called an angel syndicate, or angel group. These syndicates allow private investors to write larger checks than they could on their own, which can give them access to larger deals. Angel syndicates also give wealthy individuals access to investment opportunities beyond their personal networks, leading to improved dealflow.
Crowdfunding is another type of investing that involves individuals pooling their money to invest in a startup. There are some key differences between the two. Investors in angel syndicates tend to be wealthier and are much more likely to be accredited investors than participants in a crowdfunding campaign. Angels thus tend to write much larger checks. And angels also tend to invest at much earlier stages than crowdfunding efforts.
How angel investing works
Making an angel investment can be as simple as writing a check and handing it to a founder. However, angels often set up a limited liability company (LLC), a trust, or some other type of vehicle through which to manage their investments.
This allows the owner of an LLC to keep their business investments separate from their personal assets. Investing through an LLC may also offer tax benefits.
Angel investing is typically considered a high-risk style of investing. Most startups fail to generate any meaningful return for their investors and predicting which startups will succeed is particularly difficult at the earliest stages, where angels usually operate. That’s because these very young companies have such a short track record, giving investors limited information to assess.
The angel investors willing to accept that risk fill a key niche in the startup ecosystem, providing the capital that allows early-stage founders to get up and running and establish a proof-of-concept that they can pitch to venture capitalists and other investors in the future.