By Dave Lavinsky
On Wikipedia, I found the word “angel” defined as “a supernatural being or spirit, often depicted in humanoid form with feathered wings on their backs and halos around their heads.”
While this might depict an “angel,” it certainly is a far cry from the definition of an “angel investor.”
Below I define exactly what an “angel investor” is along with answers to the other most common angel investor questions.
1. What is An Angel Investor?
The term “angel investor” is officially defined as a private investor who offers financial backing to an entrepreneurial venture.
When several private investors form an organization to collective fund ventures, they are known as an “angel investor group.”
The act of providing the financial backing is known as “angel investing.”
The amount of angel financing is significant. According to the Center for Venture Research at the University of New Hampshire, each year over 60,000 ventures raise over $20 billion from angel investors.
2. Will an angel investor invest in my ______ (insert restaurant, hotel, technology, website, product, app, salon, etc.)?
The answer to this is “yes.”
Software is the top sector that receives angel funding, representing approximately 23% of total angel investments annually.
Healthcare Services/Medical Devices and Equipment (14%), Retail (12%), Biotech (11%), Industrial/Energy (7%) and Media (7%) are the next top sectors.
Importantly, that leaves an “other” amount of 26%. And “other” includes every type of company there is. So, yes, there is an angel investor out there who would fund your type of business.
3. What is the difference between angel investors and venture capitalists?
Venture capitalists differ from angel investors in that they typically provide more money (generally at least $2 million) and focus on companies that have achieved more operational milestones than companies generally funded by angel investors
Other key differences include the following:
- Venture capitalists are professional investors. That is what they do for a living. Angel investors do not invest for a living.
- Venture capitalists invest other people’s money in ventures. Conversely, angels invest their own money. As a result, angel investments are not always based on the potential return on investment (ROI) of the deal (the primary concern of venture capitalists) but may result from other factors such as simply liking the entrepreneur and wanting to help them out.
4. What return on investment do angel investors want?
There is no set formula for the return angel investors want. In general, they simply want a “fair” return. “Fair” might imply millions of dollars if your company eventually goes public and is valued at billions. Or, “fair” may be a 15% return, or a reasonably higher return than they would receive if they invested in the less-risky public stock market.
The key is to figure out what the prospective investor deems to be “fair” and offer it to them.
5. Where can I find angel investors for my company?
The best place to find angel investors is through networking. Who do you know? Who do your friends know? Who does your attorney know? And so on.
And then once you meet those referrals, ask who they know. And so on. By networking, you can reach tons of prospective angel investors and raise the funding you need.
Importantly, the vast, vast, vast, vast (yes, I know I just said “vast” four times!) majority of angel investors are what I call “latent angel investors.” That is, they don’t know or walk around thinking of themselves as angel investors. But, they have the means, interest and ability to make angel investors.
Latent angel investors are the BEST for entrepreneurs, since they aren’t seeing tons of potential companies to fund. As a result, if they see one good deal, there’s a good chance they’ll fund it. Conversely, those investors who see tons of deals are less likely to fund any particular venture.
Now that you know the answers to the five key angel investors questions, use this knowledge to raise this great funding source for your business.