Questions about angel investing

Whether an entrepreneur is starting a social enterprise in Africa or a high tech venture, the first capital after friends and family is likely to come from angel investors.  For those entrepreneurs, we offer some basics as provided by our friends at the Angel Resource Institute.

Q: What is an angel investor? Are there special requirements?

An angel investor is a high net worth individual who invests directly into promising entrepreneurial businesses in return for stock in the companies.  ARI recommends that all angels [in the US] meet the wealth or income requirements for “accredited investors”  set by the US Securities and Exchange Commission.  

Q: What kinds of companies do angels invest in?

Angels look for innovative startups that can grow quickly in sales and value, creating jobs along the way.  The entrepreneurs leading these companies are planning to “exit” the company in a short time period, through sale of the company to an Initial Public Offering (IPO).  Famous examples of angel-backed businesses include Google, Facebook, and Starbucks.  Many angels like to invest in companies located in their communities and in industry sectors in which they have experience or understanding.

Q: How do I know my business is right for an angel group investment?

Angel investment is the right source of funding for only a small proportion of entrepreneurial businesses. When considering yourself for investment by an individual angel or angel group, ask yourself these key questions:

  • Am I willing to give up some amount of ownership and control of my company?
  • Can I demonstrate that my company is likely to realize significant revenues and earnings in the next 3-7 years?
  • Can I demonstrate that my company will produce a significant return for investors?
  • Am I willing take the advice from investors and accept board of director decisions I may not always agree with?
  • Do I have an exit plan for the company that may mean I’m not involved in 3 7 years?

Q: When should I approach an angel group?

In general, the best time to seek angel funding is when:

  • Your product is developed or near completion.
  • You have existing customers or potential customers who will confirm they will buy from you.
  • You’ve invested your own dollars and exhausted other alternatives, including friends and family.
  • You can demonstrate that the business is likely to grow rapidly and reach at least $10 million in annual revenues in the next 3-7 years.
  • Your business plan is in top shape.

Q: How does the angel investment process work? Are there key steps?

The full process for sophisticated angel investors and angel groups often includes:  screening of an executive summary of a business plan, meeting with the entrepreneur and submission of a business plan, presentation by the entrepreneur of the plan with a Q&A period, due diligence on the company and its management team, negotiation of a term sheet and legal documents, and post-investment support, including service on the company’s board of directors, monitoring reports, and providing mentoring and advice.  In the case of most angel groups, a small percentage of companies make it through the full investment process.

Q: What are typical considerations in selecting the right investment opportunities?

In the case of an angel group, the pre-screening process often ensures a “match” on basic requirements: the company is located within its preferred geography, growth stage, industry sector expertise, and dollar investment amount.  Additional traits for the companies include a strong management team, product that solves pressing needs and has customers that will purchase it, high growth potential, competitive advantages, and exceptional return on investment.  

Q: What is the difference between angels and venture capitalists?

Angels generally invest their own money in start-ups and very early stage companies, while VCs mostly provide capital they have raised from others to later-stage businesses for growth.

Q: How do angels relate to upcoming equity crowdfunders?

Angel groups (and individual angels) are likely the next stage of financing and it is important to ensure that entrepreneurs have access to robust angel capital after crowdfunding.  These types of accredited investors are also important to entrepreneurs for their mentoring and advice, and for better structuring investments for long-term growth.

Q: How much money do individual angels invest in a company?

The amount depends on many things, but most investments by individuals are between $5,000 and $100,000 per company round.  Many times, several individuals invest in the same company at the same time, making the total investment in the business be between $20,000 and $1,000,000 or more.

Q: What is the size of the angel market in the United States?

The Center for Venture Research estimates that U.S. angel investors invested $22.5 billion in about 66,000 small businesses in 2011.  Many of the investments were in start-up or very early-stage companies.

– See more at Angel Resource Institute.  Readers are encouraged to suggest topics for future posts related to early stage entrepreneurship and investing by providing a comment.

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