What Is an Angel Investor? What to Know About Business Angels
Angel investors sound like mythical creatures. But they’re more common than you think. And they can be the difference between success and failure for startup companies.
In this article, we’ll answer the question, what is an angel investor? We’ll also explore how they can help and what they look for in an investment. Let’s get started…
What Is an Angel Investor?
Some people believe the term “angel investor” comes from Broadway. When producers needed funding, they often turned to the wealthy folk uptown. To this day, angel investors look for opportunities in theater.
But angel investing doesn’t apply only to Broadway. Now, “business angel” is a term often used for wealthy people who invest in startups. They are common in Silicon Valley, home of many technology startups.
Typically, these investors are wealthy and have business experience. Angel investors often look for opportunities where they can provide guidance. For example, if they worked in the technology sector, they would likely invest in technology startups. Many angels were entrepreneurs or managers themselves.
So now that you have a better understanding of what an angel investor is, you might be wondering…
Why Get an Angel Investor?
There are a few reasons businesses can benefit from business angels. The primary reason is finance. Angel investing can provide a needed steppingstone. It often comes between two stages of funding. The first stage is seed capital. This comes from founders and others close to the company. The second stage is funding from outside investors. This comes from investment funds and loans.
But startups can’t always make it from seed to other stages. And that’s where angel investors step in.
They often offer experience, advice and a network of connections as well. For example, look at the investors from the show Shark Tank. The “sharks” have specific business experience and are willing to invest their own money. If a technology startup goes on the show, it will often look for a shark with a background in technology. That’s because the shark knows the business, the industry and the people. And having that investor’s name on the project can bring reputation and credibility.
Overall, angel investors can provide money and guidance to improve a business. But if you’re looking for investors, there’s a question you might be asking…
What Do Business Angels Look For?
When business angels look to invest, they usually don’t have much information about the businesses. Sometimes startups haven’t sold a single product yet. So, what do angel investors look for?
A study published in the Journal of Business Venturing suggests that they look at personality. Someone who is passionate about the business and its mission is more likely to get the interest of business angels. However, the study also implies that older investors favor passion over younger ones.
Startups should also impress. So do your homework on the angel investor. Learn their business history, education and interests, if possible. This step is easier with well-known investors but knowing information about any angel investor’s background can always give you an advantage.
Another study in the Journal of Business Venturing shows that there are eight criteria often used by business angels:
- Willingness of market to adapt
- Status of product development
- Protection of intellectual property (i.e., patents)
- Likelihood customers will engage
- Ability to market the business model
- Potential for market growth
- Relevant experience of management within company
- Solid financial modeling.
If you’re looking to be an angel investor or are interested in startup investing, check out “How to Invest in Startups.” It’s a great guide to help start you on your angel investing journey.
About Amber Deter
Amber Deter has researched and written about initial public offerings (IPOs) over the last few years. After starting her college career studying accounting and business, Amber decided to focus on her love of writing. Now she’s able to bring that experience to Investment U readers by providing in-depth research on IPO and investing opportunities.