Angel investors, also known as seed investors or angel funders, are private investors that often have been entrepreneurs themselves. They have a high net worth that they personally invest in early stage companies.
What is an angel investor?
An angel investor is a professional private investor. Usually an angel investor has a high net worth, for example because they had their own company. This type of investor uses their own money to invest in early stage companies, like startups for instance. Angel investors fill the gap between family and friends at the very start of a business venture and venture capital, which usually comes in when a company is operating in full force.
Angel investors become a co-owner of the company they invest in.
Because startups need a lot of capital and do not make a profit for a while, angel investors usually buy company shares instead of investing in a regular business loan. Through buying shares, angel investors become a co-owner of the company they invest in alongside other shareholders. Unlike investing in a business loan, there is no payback of debt. Instead, the returns are based on future company results.
Angel investors are important for startups
Angel investors are important for startups to take their first steps. Around 90 percent of early-stage investments in Europe come from angel investors. There are more than 300 thousand active European angel investors and the number keeps growing.
Angel investors can help startups raise extra funds.
Aside from much needed seed capital for startups, angel investors can help early stage companies raise extra funds. This is because buying shares does not create debt for the company in question. Instead, the investment becomes part of their own equity. Since their equity increases, the investment can function as collateral for a loan at the bank. And so, funding a startup can be a way to raise more capital to fuel further growth.
Type of investor
Angel investors are important for startups, but these investments are high risk. Therefore, first time investors will usually not choose this type of investment. An angel investor is instead a more experienced investor with a lot of spare funds.
Angel investors are also more personally involved in their investments. They may choose to invest in a company in their own industry while also offering their own experience and connections. By doing this, they can help the startup they invest in be more successful. And because they are experienced in the field, their investments are usually better informed.
Investments of an angel investor are usually better informed.
Seed investors typically invest up to 50 thousand euros at a time. According to the European Commission, the median investment of angel investors is around 30 thousand euros. Since an angel investor usually joins forces with fellow investors, together they can raise a higher amount.
Becoming an angel investor
Becoming an angel investor used to be a lot more difficult, since every angel investor had their own contracts and paperwork. Nowadays it is much easier to start investing thanks to countless online platforms. You can join an online network of angels or invest in startups via equity crowdfunding websites. On these platforms you can start investing with smaller amounts and easily choose and manage your investments.
Through equity crowdfunding people can buy shares in a company. This usually means there are a lot of smaller co-owners instead of a handful of big investors. Equity crowdfunding is also less expensive than buying shares on the stock market.
Nowadays it’s easier to start investing thanks to countless online platforms.
In addition, you can join online angel investor networks. It can be useful to join a group of angel investors because you can share due diligence and have a steady influx of startups. And just like with equity crowdfunding, individually you can invest a smaller amount but join together to raise enough seed capital. Lastly, a fellow angel investor may have a certain expertise or connections that may come in handy.
Funding startups is risky, since there is no way of knowing if a company will survive, let alone be a success. It can be hard to value your investment because the startup has no track record or built up equity yet. It is possible you lose your investment, because the majority of startups do not survive. If the startup does succeed, however, the returns can be very high.
There is a possibility your share decreases in value.
Aside from the high risk of startup investing, there is a possibility your share decreases in value. With equity crowdfunding or angel investor networks, a company can have many smaller co-owners. And if the startup needs growth capital later down the line, there can be even more shareholders. The upside of this is that the company does not rely on a few huge investors. However, this also means your share can be diluted.
As an angel investor, there are some things you can do to manage these risks. First of all, make sure to spread your investments across several different projects. Furthermore, you can choose to invest in startups with a convertible loan instead of immediately buying shares. This type of loan has no payout at first and can be turned into shares once a company shows results. If the company fails, you will still get payback and interest from the loan.
If the startup you invest in grows and becomes successful, the worth of your share will increase. An angel investor may receive dividends, but for startups this will not be for at least a couple of years. And even then it is not a guarantee. Instead the main source of profit is capital gains from increased shares. And so, you can sell your share at a much higher price than when you first bought it. Most startups fail, but if you bet on the right horse, your returns can be over a thousand percent.
In addition to being high risk but high reward, startup investing is certainly a long term investment. After all, it will take time before the value of your share increases. This will take at least three to five years or more. Keep in mind that you have to keep the shares during this time before you can sell them. You have to wait until the startup is sold or goes to the stock exchange. Alternatively, you can sell the shares on some equity crowdfunding platforms.