What Is an Angel Investor?

Is an Angel Investor Right for Your Small Business?

Angel Investor
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Definition:

An angel investor is a person who invests in a business venture, providing capital for start-up or expansion. Angel investors are typically individuals who have spare cash available and are looking for a higher rate of return than would be given by more traditional investments. (Typically an angel looks for a return of 25 percent or more).

An angel investment is a form of equity financing - the investor supplies funding in exchange for taking an equity position in the company.

Equity financing is normally used by non-established businesses that do not have sufficient cash flow or collateral with which to secure business loans from financial institutions (debt financing).

Angel investors are perceived of as "filling the gap" between the small-scale financing provided by family and friends and venture capitalists.

Advantages and Disadvantages of Angel Investors for Business Owners:

The big advantage - Financing your business via angel investments is much less risky than debt financing. Unlike a loan, invested capital does not have to be paid back in the event of business failure, and most angel investors understand business and take a longer-term view.

The primary disadvantage to taking on investors is loss of complete control - as a part owner the investor has a say in how the business is run and will receive a portion of the profits when the business is sold. With debt financing the lending institution has no control over the operations of the company and takes no share of the profits.

Sources of Angel Investors:

Angel investments normally come from:

  • Family and friends - this is by far the most common source of funding for business startups and is the only option for many. Given the high rate of failure with new businesses it is also risky in terms of the possible impact on family/friend relationships if the business is not successful. It is important to be upfront about the risk of failure.
  • Wealthy individuals - such as successful business people, doctors, lawyers, etc. that have a relatively high net worth and are willing to invest up to (typically) $500,000 in a business in return for equity. Individual angel investors can be difficult to find. Often this is done by word of mouth through business associates or associations such as the local Chamber of Commerce.
  • Groups - it's becoming increasingly common for angels to operate as part of an angel syndicate (a group of angel investors), which raises their potential investment level accordingly. Investors contribute funds to the syndicate and a professional syndicate management team chooses the investments. How to Find an Angel Investor, gives some examples of active Canadian angel groups.
  • Crowdfunding - a form of online group investing, crowdfunding involves raising funding by having large groups of individuals invest amounts as small as $1000. (Read about the current state of crowdfunding in Canada.)

An angel investor is often looking for a personal opportunity as well as an investment - they may have valuable business experience as well as money and want to play some sort of active role in managing the company.

Because he or she is interested in adding value to the company, it's important for any business person thinking of accepting an angel investment to be very clear about what the investor is bringing to the deal besides money, and to develop an understanding of what the angel investor would be like to work with.

Having a comprehensive business plan is a must for any business wishing to secure financing from lenders or investors (See Prepare an Investor Ready Business Plan).

For more about how to make your business attractive to an angel investor, see Attracting Angel Investors.

Also Known As: Angel.

Examples: Because of an angel investor, Martha was able to buy the equipment she needed to expand her business.

See also:

Finding Business Start Up Money

10 Things You Need to Know About Small Business Funding

7 Things Angel Investors Are Looking for in a Business 

How to Prepare an Investor Ready Business Plan

How to Get a Small Business Loan