Angel investors usually invest in innovative entrepreneurs and promising small startup companies. Although early investors in a startup company tend to be close friends and family members, professional and everyday investors are often willing to invest seed capital in promising companies that are likely to attract additional investment. Angel investors are a good source of one-time capital infusions to help launch or maintain the financial stability of a fledgling company.
Angel investors typically take a long-term approach to investing by providing favorable interest rates on capital loans. This allows aspiring entrepreneurs to focus on the development of a product or service. Unlike traditional lenders and venture capitalists, angel investors focus on the future prospects of a startup company rather than existing income and assets. Angel investors focus on helping entrepreneurs succeed in exchange for an ownership stake, convertible debt or company equity. An angel investor may be identified by any of the following terms:
- Informal investors
- Angel funders
- Private investors
- Seed investors
- Business angels
The angel investing concept actually began on Broadway. Wealthy patrons of the arts invested in promising theatrical productions. Now affluent angel investors employ a variety of financial vehicles to pool capital and inject money into innovative companies, including investment networks and online crowdfunding platforms. Angel investors are required to meet the Securities and Exchange Commission’s accreditation standards. SEC standards require a minimum annual income of $200,000 and a minimum net worth of $1 million to become an angel investor.
Angel investing has accelerated in recent years. Widely publicized success stories such as Facebook, WhatsApp and Uber have propelled angel investing to unimagined heights.
Although angel investors may be hoping for outsized returns, most experienced angels are searching for entrepreneurial passion, dedication, concept quality, market opportunity, potential growth and personal integrity. Angel investors typically invest between $25,000 and $100,000. A clearly defined business plan and initial signs of success are important aspects of attracting angel investment capital. Intellectual property rights and the development of innovative technologies are especially attractive.
Angels are looking for a reasonable company valuation, favorable terms and the prospect of raising additional capital.
From the standpoint of an aspiring entrepreneur, raising capital is time-consuming and demanding. Angel investors are seeking answers to fundamental financial questions. The amount of capital to be raised, detailed financial projections and the anticipated monthly financial burn rate are only the beginning of what will be necessary to attract angel investors and the crucial seed capital that aspiring startup companies require.