Everything You Need to Know About Angel Investors

What is an angel investor?

Angel investors are typically accredited investors who must have earned over $200,000 in each of the last two years. If the angel investors are a couple filing their taxes jointly, they must have an annual income of at least $300,000. The accredited investor can also qualify by having a total net worth of $1 million or more, excluding their primary residence.

Angel investors tend to invest in companies in their neighborhood, region or industry. They can invest independently or as part of an angel investor network. And they don’t just throw money at the next big thing — there’s usually more meaning behind what they choose to invest in.

“Angel investors want to invest in something they have an affinity for,” explained Adam Burrows, co-founder and managing director at Range Ventures. “It may be something in their own backyard, a local business or [an] industry they are passionate about.”

How does angel investing work?

Angel investors can invest independently, as part of a network that shares information and investment ideas or through a fund where everybody in a group contributes money. In the case of a fund, the group collectively decides which companies to invest in and how much to contribute. When part of a network, however, individual angels typically make their own investment decisions.

While the process may vary depending on the investor and the deal structure, here’s an overview of the steps involved in seeking funding from an angel investor:

Step 1: Prepare your angel investment pitch.

Before approaching any angel investor, you must be thoroughly prepared. Determine the following:

• How much money do you want the angel investor to contribute?
• What is your specific plan for spending that money to establish or grow the company?
• How much equity are you willing to give up for the investment?
• If repaying the investor, what terms will you consider?

Next, conduct market research so you can thoroughly and passionately explain the opportunity to the angel investor. Put all this information together in a professional-looking slide deck and practice your presentation until it’s flawless. Additionally, prepare a one-minute elevator pitch that summarizes the opportunity concisely and captures a potential investor’s interest.

Step 2: Find an angel investor.

Your next step is finding suitable angels to help your cause. Consider the following ways to locate angel investors:

• Leverage your personal network: There may be people in your network who are wealthy and interested in investing. For example, consider reaching out to a retired founder of a company you worked for, a family member, a mentor or a family friend. Since you already have a relationship with these individuals, they may be more willing to hear your pitch and offer support.
• Get involved with angel groups and networks: Dedicated online communities connect angel investors to entrepreneurs seeking funding. Examples of such platforms include AngelList, Gust, Investor Hunt, Angel Forum and the Angel Capital Association (ACA).
• Participate in startup events and pitch competitions: These types of events are usually thrown by business incubators, venture capital (VC) firms, angel investor groups and startup accelerators like Y Combinator. Before signing up, confirm that the event targets pre-seed and early-stage investments rather than more mature companies seeking growth funding.
• Leverage professional networking channels: Network on LinkedIn to find potential angel investors. Additionally, attend industry and startup events to gain face-to-face exposure to potential investors and connect with fellow founders. Before networking, practice your elevator pitch until you can deliver it confidently. Be prepared to discuss key details such as your profit margin, recent sales figures and intellectual property assets.
• Join an incubator or accelerator: If you have a startup incubator or accelerator with space in your area, take advantage of the opportunity to grow your business. Areas with established innovation zones or tech corridors are particularly likely to have these resources available. There is a wealth of opportunity here, including access to potential angels, mentoring, strategic partnerships and small business grants.

Step 3: Schedule and deliver your pitches.

After identifying a promising angel investor, your next step is to deliver a compelling elevator pitch. This brief, confident sales pitch should grab their attention and help spark interest in your new venture. They will likely ask a few initial questions to learn more about your ideas, business plan, goals and motivations.

If all goes well, you can schedule a more formal meeting to present a detailed investment pitch. However, before that meeting, thoroughly research the investor so you can tailor your pitch to their background, motivations and passions. For example, if they value socially conscious businesses, emphasize how your product or company can improve lives or benefit future generations. If they take pride in successful partnerships, highlight how your business aligns with their track record and how you would be honored to join their portfolio.

Come prepared to answer the angel investor’s in-depth questions about financial projections, market opportunities and even your personal motivations. Use this opportunity to broaden the conversation and gain a clearer sense of their priorities and how they make investment decisions. The more you understand what drives them, the better positioned you’ll be to refine your pitch and demonstrate alignment with their values.

Step 4: Negotiate your deal.

If the angel does not wish to proceed, thank them for their time and concentrate on your next pitch. However, if they’re excited about the opportunity, you’ll move to the negotiating stage.

Clearly explain the equity percentage or loan repayment terms you have in mind, along with your rationale. Listen carefully to their feedback and remain open to adjusting the terms. In many cases, an experienced angel investor will bring industry knowledge that may prompt you to revisit certain strategies or timelines. That said, don’t lose sight of your business’s core value proposition — know which terms are flexible and which ones are not.

Since the deal will be a legal contract, consult a business lawyer to help you frame and negotiate the terms. All details of the deal, including the funding amount, payment schedule and other terms, must be clearly outlined in the contract. The attorney will also help protect your interests and ensure you fully understand all the terms, requirements and limitations of the agreement.

Step 5: Use the invested funds.

Once the investment funds are deposited into your account, the real work begins. Use the contract as a guideline for how the funds should be spent. If circumstances change and it becomes more advantageous to allocate the funds differently, discuss the changes with the investor and provide a clear explanation of your reasoning.

Ultimately, the angel investor wants your business to be successful, but they may have some ideas or other input you should consider. Some angels will want to be more involved while others are more hands-off. Typically, angels with an equity stake or relevant industry experience will expect to be consulted on strategic decisions. You may also be required to report your results to the angel at specified milestones.

Why do angel investors invest?

Angel investors often invest for personal reasons. “A lot of angel investors were entrepreneurs themselves and want to give back to the local community,” explained Patrick Gouhin, CEO of the ACA. “They like the mentoring aspect.”

While angel investors care about the companies they invest in, they’re not entirely altruistic. They’re also looking for a return on their investment.

Angel investors make their money when either of the following events take place:

• There’s an initial public offering (IPO): An IPO is one way angel investors profit from their investment. However, Gouhin shared that only a small fraction of startups — roughly 2 percent to 3 percent — ever become publicly traded companies.
• The business is acquired: It’s more likely that angel investors will make money when the business is acquired. “For the majority, the exit is through an acquisition from a larger company,” Gouhin explained. “That’s where angels and founders get a return on their investment.”

Angel investors are along for the ride — but they want out eventually. “The only way angel investors get paid is if there is an exit,” Gouhin noted. “One of the early questions entrepreneurs get is, ‘How far can you take it and who is going to buy it?’”

What are the pros and cons of angel investors?

Angel investors play a vital role in building the big companies of tomorrow. However, this funding avenue isn’t for everyone. There are pros and cons to working with angel investors.

Pros of working with angel investors

Raising capital from an angel investor offers several advantages over other funding methods:

• It’s easier to get funding with angel investors: Banks, lenders and venture capitalists (VCs) have specific criteria businesses must meet to receive capital, such as having customers and sales. They won’t lend you money based on an idea. In contrast, angel investors are more willing to take risks. They have the cash and are willing to spend it. They don’t have to answer to higher-ups in the firm or meet underwriting criteria. If they like you and your business idea, nothing is stopping them from investing in you.
• Borrowing from angel investors is low-risk: Tapping angel investors to fund your business lessens your risk. Angel investors are betting on you. They don’t expect you to pay them back if things go south, which isn’t the case with banks and lenders.
• Angel investors offer advice and assistance: Beyond capital, angel investors bring mentorship and real-world experience to the table. Many have built and scaled businesses themselves and serve as a valuable sounding board for entrepreneurs navigating early-stage challenges. They want you to succeed and won’t mind rolling up their sleeves to help you get there. “Angel investors often contribute their experience, expertise and contacts to help drive the business forward and help increase their chances of success, which is obviously in everyone’s interest,” explained Mike Lebus, founder of Angel Investment Network.

Cons of working with an angel investor

Working with an angel investor isn’t an ideal scenario for all entrepreneurs:

• You give up some control with angel investors: Angel investors typically want at least a 20 percent stake in your business. When you accept an investment in exchange for equity, that means you have someone else to answer to. “Whenever you raise equity funding — whether it’s from family and friends, angel investors or venture capital firms — you now obviously have shareholders, which brings added responsibilities, admin and pressure,” Lebus explained. If you are wary of giving up control but need the capital, Lebus advised agreeing in advance on how involved the investors will be in your business.
• Angel investors invest smaller amounts: Angel investors arrive in the early days before the business has much in terms of customers and sales. As a result, the investment tends to be smaller than it would be with venture capital. Individual angel deals typically range from $5,000 to $500,000, while angel groups may fund rounds of $250,000 to $1 million or more. Later-stage startups can easily raise millions from a VC. “We generally advise companies to raise enough funding to give them a 12-to-18-month runway,” Lebus said. “Fundraising can be time-consuming, so it’s not something founders should be doing too often, as they’ve obviously got a business to run.”
• Angel investors have limited areas of investment: Like VCs, angel investors are discerning about the companies they work with. In addition to being regional or locally focused, angel investors tend to avoid mom-and-pop and family-owned businesses.

Best practices for finding angel investors

Angel investors are everywhere. However, finding one might feel like searching for a needle in a haystack, particularly if this is your first rodeo. Here’s some advice about finding angel investors:

• Browse angel investor networks: According to the ACA, there are more than 200 angel network groups across the country that accept pitches from business owners and share information. The Angel Investment Network website is an excellent resource where you can search for angels and upload your business pitch. Gouhin recommended starting with the networks in your local area and spreading out from there. “Keep working outward until you find the right group and the right time that has an interest in your product,” Gouhin advised.
• Tap into your network: Burrows advised raising capital through your personal and professional networks. Your contacts already know you and your business and are more likely to hear you out. Reach out to them to gauge their interest, pick their brains about potential investors and enlist them to endorse you and your business. If you’re in a niche industry, reach out to business leaders within your niche through an introduction or a cold call on LinkedIn.
• Be prepared: Prepare to sell your story to investors during your outreach while demonstrating your entrepreneurial motivation. Have a startup marketing plan and create a slide deck that includes your financial projections, elevator pitch and growth opportunities. Having advisors on your team who bring credibility and experience is vital. Burrows advised bringing them on as mentors or offering them equity. The more qualified you and your team are in the eyes of investors, the better your chances of securing funding.

How is an angel investor different from a VC?

Angel investors and VCs are both considered alternative funding sources. However, angel investors and VCs differ in the following ways:

• Angel investors usually have an emotional connection: Angel investors tend to have an emotional connection to the companies they fund. They typically work with companies that have personal meaning to them. In contrast, VCs focus more on extracting a profit from their investments. They seek fast-growing startups that will disrupt an industry.
• Angel investors provide seed money: Business owners typically seek angel investors after exhausting personal funds and funding from family and friends. At this stage, angel investors provide seed money — typically tens or hundreds of thousands of dollars. In contrast, VCs invest in more established companies. When VCs are involved, you’re more likely to see million- or even billion-dollar valuations.
• Angel investors use their own money: Angel investors use their own money to bet on companies they think have potential. They take money from their own bank accounts to fund a business, which is often a risky proposition. In contrast, VCs raise money from outside investors. They usually work for a firm or fund and use other people’s money to invest in companies. If a VC makes a bad bet, only the outside investors lose money.
• Angel investors are OK with a lower-level role: Angel investors are typically comfortable taking a lower-level role in a company. In contrast, VCs usually want to play an intimate part in growing the company. They often request a seat or two on the board of the companies they invest in.

Both angel investors and VCs want to mentor and guide the companies they invest in — and expect an equity stake in return. However, an angel investor’s terms may be less rigid.

Stay tenacious when seeking angel investors

At the end of the day, Burrows said, tenacity is the key to raising capital.

“Fundraising is difficult. It doesn’t matter if you are trying to raise $10,000 or $10 million; it’s a numbers game. You’ve got to talk to a lot of investors,” Burrows advised. “You can’t take rejection personally. You have to know it’s going to be difficult but go after what you want anyway.”

Jennifer Dublino contributed to the reporting and writing in this article. Source interviews were conducted for a previous version of this article.