Whether you’re an entrepreneur or an investor, it’s always good to know what options are available to you in the event that you need additional funding to take your business to the next level.
One option that many people don’t know about are business angels, which are individuals who choose to invest their own money into new companies they believe have potential to become profitable in exchange for some form of profit sharing and equity.
A Business Angel is an individual who invests in small, young companies, and provides both financial resources as well as knowledge and experience, usually in return for partial ownership of the business.
Learn more about these unique investors with this helpful guide on what is a business angel and how you can find one to help fund your startup.
A Business Angel is an Investor
A business angel is an individual or group of individuals who invest in small, young companies.
They are also known as angels because they aren’t technically venture capitalists. Rather than supplying capital in exchange for partial ownership, business angels provide their money on an informal basis in exchange for certain rights and conditions.
Business angels may play a key role at some point during your company’s growth. However, business angels usually have no control over how you run your company; rather, they hope to enjoy success by sharing it with you through high interest rates and tax deductions.
Depending on their experience level, business angels can invest from $10,000 to more than $1 million into your business, Cavallo says.
The first $200,000 usually comes from their own bank account. After that, business angels typically get investment capital from groups of investors called angel groups or angel networks.
For example, Boston-based MassVentures manages an investor group with more than 250 members and has invested in more than 50 Massachusetts companies since 2006.
Its typical investment amount is between $25,000 and $100,000 per company; so far it has put about $20 million into startups.
On top of that funding source are single investors who make larger investments in businesses they believe have huge potential.
Know the difference between high risk and low risk
There are two kinds of business angels to be aware of: high-risk and low-risk. Low-risk business angels are typically wealthy individuals or small groups who seek out early investment opportunities in established companies or entrepreneurs who have proven that they can succeed.
High-risk investors, on the other hand, are more likely to put money into startups with a great idea but little experience.
These investors often feel that having little invested will give them leeway if something goes wrong.
Either way, make sure you understand what kind of angel you’re talking to before discussing terms and getting started.
Things business Angels look for
The qualities of successful startups vary, but most business angels are looking for companies that have either product-market fit and/or sales traction.
You’ll also want to show that you have experience growing a business and setting an achievable path to profitability.
Ideally, your team will have previously worked together, since it takes time for founders to develop shared vision and trust.
Angels also look for solid financial projections. While more businesses are able to bootstrap today than ever before, you still need proof that you can acquire customers and generate revenue if you want investors to pay attention to your business plan.
Types of investments
There are three main types of investments from an angel investor. The first type is equity, where you're selling partial ownership in your company in exchange for cash or services.
The second option for an angel investor to invest into your business is debt, meaning you'll use their money as a loan that you then pay back at agreed-upon terms.
Finally, there's convertible debt which gives an investor similar interest as equity but can be converted into actual equity after it has been paid off several times over.
To get started, you'll need to start by pitching your idea and company to investors. You can find angel investors using your personal networks and asking family, friends and colleagues if they know anyone who might be interested in an investment opportunity.
However, another great way to find angels is through angel investor directories like Gust or Wefunder where you can browse a directory of potential funders looking for new opportunities.
It's also worth checking out some online platforms where business owners can connect with entrepreneurs including Gust Launch, CB Insights Invest OnTheSpot and SecondSeed.
What is a Business Angel - The Bottom Line
As many entrepreneurs struggle to secure funding, it’s important to remember that there are ways to work around these roadblocks.
One of those ways is via crowd investing, which, when done correctly, allows you to tap into social networks and build broad-based support for your business idea.
So what exactly does crowd investing mean? It basically means anyone can invest in your business without having a special financial license. While not as large in scope as angel investors or venture capitalists, these individuals have enough money and interest to help drive successful startups forward.
While business angels are typically accredited investors with a net worth of $1 million or more, anyone can be an angel. Thanks to websites like Kickstarter and Indiegogo, individuals who may not have connections or cash to invest in your idea can still contribute by donating funds.
However, there are also sites that allow you to raise money from friends and family (also known as peer lending). Sites like Zopa and Savy provide loans between $2,000 and $25,000 at low interest rates without requiring any credit checks.
They do request some personal information such as bank statements and tax returns; but if everything checks out, they approve your loan within one business day.