What is angel investing?

A Guide for Aspiring Investors

Angel investing is Pivotal in Shaping the Entrepreneurial Landscape

​You may have heard the term but might not fully understand what it means or how it works.

​Whether you're a seasoned investor or just beginning your journey, this guide will help you better understand angel investing and its impact on startups and innovation.

What Is Angel Investing?

Angel investing is the practice of investing capital into early-stage companies, usually startups, in exchange for equity (ownership) in the business.

Angel investors are often high-net-worth individuals or groups who provide the initial financial support to help a startup grow. 

​They are called "angels" because, without their support, many early-stage companies would struggle to secure the funding they need to survive.

How Angel Investing Works

Starting at the 'Pre-Seed' or "Seed Level"

Angel investors typically invest in the "seed" or "early-stage" rounds.

This means they provide the initial funds a company needs to grow before it can attract larger investments from venture capitalists or other institutional investors.

Here’s a breakdown of the process:

1. Discovery: Angel investors find startups through networking, pitch events, or online platforms. Startups often pitch their ideas to investors to secure funding.
2. Evaluation: Investors assess the business model, team, product, market potential, and risk factors before committing funds.
3. Investment: Once an investor decides to back a company, they provide capital in exchange for equity or convertible debt, which converts into shares later.
4. Mentorship and Industry Connections: Many angels offer more than just money—they bring their experience, industry connections, and strategic advice to help the startup succeed.
5. Return on Investment / Exit Strategy: The investor aims to see a return on their investment through an "exit," which could be when the startup gets acquired, goes public (IPO), or raises a larger funding round.

Who Are Angel Investors?

They are Individuals or Groups of People

Angel investors can be individuals or part of an angel network or syndicate, pooling their money together to invest in a startup.

These investors typically have these characteristics:
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• Accredited Investors: In many countries, angel investors need to meet specific income or net worth requirements to be considered "accredited." In the U.S., this means earning over $200K per year (or $300K jointly with a spouse) or having a net worth exceeding $1 million, excluding their primary residence.
• Entrepreneurs: Many angel investors are successful entrepreneurs themselves who understand the risks and challenges of building a business.
• Professionals: Some angel investors are experienced professionals—doctors, lawyers, tech executives—who use their knowledge and networks to help guide startups.
• Impact Investors: Some angels focus on businesses that align with their values or support causes they care about, such as sustainability or social equity.

Why do People Become Angel Investors?

To Get the Inside Track on Startup Growth
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Angel investing can be both rewarding and risky. Here are some reasons why individuals choose to become angel investors:

• High Potential Returns: Startups are risky, but the upside can be significant. If a startup succeeds, the value of an angel's equity stake can grow exponentially.
• Diversify Their Portfolio:  Investing in startups provides an opportunity to diversify a portfolio, especially for those looking for alternatives to traditional stocks and bonds.
• Support Innovation: Many angels are passionate about entrepreneurship and innovation. They enjoy the opportunity to support cutting-edge ideas and technologies (i.e., such as Artificial Intelligence) and play a role in building the next Big Thing!
• Mentorship:  Angel investors have a unique opportunity to mentor, coach and support the next generation of entrepreneurs. 
  
• Career Advantages:  With the advent of Artificial Intelligence, many organizations are cutting back on staff. By learning about startups and their approach to the 21st Century workplace, this provides you with relevant career advantages. 
• Networking: Angel investing provides opportunities to connect and build satisfying relationships with other investors, entrepreneurs, and industry leaders.

Risks of Angel Investing

While the potential rewards can be great, angel investing comes with risks.

Startups have a high failure rate, and it's possible to lose your entire investment.

Here are some key risks to be aware of:|
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• Lack of Liquidity: Angel investments are not liquid. Unlike stocks, which can be easily bought and sold, you may need to an average 5-7 years before you see a return (if ever).
• High Failure Rate: Many startups fail. It’s common for angel investors to lose money on some investments, while a few winners may provide the returns that pay for the ones that went nowhere.
• Lack of Control: As a minority shareholder, you have little say in how the company is run or the strategic direction it takes.​

How to Get Started in Angel Investing

Here are some steps to guide you:

1. Educate Yourself: Understanding startup financing, valuation, and market trends is crucial. Consider taking courses, reading books, or joining angel networks to learn more. Consider joining Startup Investors Lab, where you can learn how to evaluate and invest in startups, and apply the knowledge you are learning from books and courses!
2. Join Angel Groups: Being part of an angel network allows you to pool your resources with other investors and learn from experienced angels.
3. Join the Startup Investors Lab Community for FREE!
4. Start Small: Begin by making smaller investments (i.e., as little as $1,000) to test the waters and build your knowledge of the space. 
5. Diversify: Don't put all your money into one startup. Spread your investments (even if only $1,000 per startup) across multiple startups and industries to reduce risk.
6. Share Expertise: Many angels contribute more than just money. If you have expertise in a particular industry or field, use it to support the startups you invest in. 

Summary

Angel investing plays a crucial role in helping startups grow, while also offering investors the chance to support innovation and potentially earn high returns.

However, it’s not without risks, so if you’re interested in becoming an angel investor, it’s important to educate yourself, diversify your investments, and be prepared for a long-term commitment.

For aspiring angels, the rewards go well beyond financial returns—they include the excitement of helping to shape the future of business and innovation.

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By Randy Shawn Fisher
​Founder & CEO, Startup Investors Lab