An angel investor is usually a high net worth individual that invests in a startup or small business, providing funds in exchange for equity in the business.
They can invest as early as when a company is merely a concept, or after the business has proven to have some foothold. Often angel investors are from a network of entrepreneurs.
Since angel investments are often risky, investors expect a return of 25% or more when investing in a business. Angel investments often do not represent over 10% of the angel investor’s portfolio.
Angel investors even are known to offer more favourable terms compared to other lenders like venture capitalists, since they are usually investing in getting a company venture off the ground before involving in its profitability.
Five different types of angel investor are:
- A close relative or friend investor
This represents the investor who knows you personally. Since this type of investment remains emotional and private, it works great if everyone comes into the circumstances with “their eyes and hands wide open.”
Family investors will usually not have much of a value-added and may unnecessarily create interruptions later on in the business’s growth.
- The business companion investor
Also called as the previous-colleague angel, the business-companion investor can be a powerful valuator to potential investors and can be sure of the entrepreneur’s work.
Not only will their experience help you, but this investor can also be extremely supportive and helpful to get resources and employees for the company; however, they might not act as much of a value added after the initial rounds of financing.
- The Field investor
This investor has detailed knowledge of your precise industry or category. They are typically operating executives who have spent their whole career in a particular vertical. This industry-insider is a better evaluator for potential investors but perhaps a bit over-eager to share unwanted advice.
- The once-removed investor
An entrepreneur will usually be linked to a once-removed investor via an associate or personal relationship. These investors probably don’t know who you are and are not familiar with your idea. It’s typically difficult to get them on board with no extra angel investors who already bought into your idea.
- The Archangel Investor
Also called as “super angel investor”, having a record of accomplishment for many successful investments. They often remain part of a big venture capital community and add great value to your network, mainly if you plan to keep on raising venture capital. A potential disadvantage may be that they are quite busy with other investments and perhaps unable to be as involved as other angel investors are.
Generally, you wish to aim for an angel funding round that has a combination of the close investor, the business-companion investor, and the field investor along with some once removed investors.
Spend your time and do thorough research to find out relationship investors or idea investors that bridge you and your business to the next round of funding.