Business angels are entrepreneurs with a high net-worth who make an investment in a start-up company with the aim of making high returns on their investment in three to seven years. They do this by buying into the company. The term ‘angel’ was borrowed from Broadway, where, a private investor would put up the money to run a show. Business angels are also known as angel investors and informal investors.
There are differences between angel investors and the more formal venture capital investors.
- Angel investors put in their own money while venture capitalists are professionals who manage and invests funds from a third party such as a foundation, retirement fund or an insurance output.
- Business angels also tend to make smaller investments ($5,000-100,000) in startups or relatively new business while venture capitalists on the other hand invest in well established companies and in the range of millions of dollars.
An angel investor will choose to invest in a business for various reasons, not always for monetary gain. Some choose to get involved with startups because they are retired entrepreneurs who want to pass on their body of knowledge and to provide mentorship for startups. They may also get involved to share their networks and contacts with the start-up and give it a better chance of succeeding. Business angels tend to work with start-ups within their own geographical locale.
In the United States today, it is estimated there are 250,000 individual angel investors making investments in almost 62,000 companies. The leading areas in which they invest are: medical devices, telecommunications, manufacturing and software development. There has been a recent spike in the amount of investment being made in the medical sector.
Since angel investors are individuals with no public registry, it may prove a challenge to know where to find them. However, now there are ‘angel groups’ who are accredited business angels (normally 10-15 angels) who come together so as to make larger investments per turn. These groups also come together to share deal flow and information on due diligence. An accredited business angel is one who has met the stipulated requirements as outlined by the Securities and Exchange Commission (SEC).
If you are an individual wondering whether you can attract a business angel to finance your start-up, you must meet some threshold requirements such as
- having an already developed product
- a sound business plan
- established (and growing) customer base
- and potential for extremely high revenue turnover over a three to seven year period