About Angel Investors

An angel investor is a wealthy person who provides money to a young company in exchange for a share of the ownership. They do so with an eye toward cashing out at a big profit once the company becomes successful. Angel investors generally invest less money in a company than venture capital firms do, and they often want a role in managing or advising the company.

Who Angels Are

Anybody with a lot of money available to put into a company could be an angel investor. According to "The Wall Street Journal," angels are often entrepreneurs who built successful companies of their own, sold them and are now looking for opportunities to get in on the ground floor of profitable ventures. Since 2000 or so, "angel groups" or "angel networks" have sprung up that allow investors to share ideas and pool their money for angel deals.

What Angels Want

Angel investors aren't philanthropists. While they may enjoy helping an entrepreneur realize her dreams, they invest to make a profit. They're looking for companies that have high growth prospects and the potential to "go public" with a stock offering. The bigger a company grows, the more valuable their ownership stake becomes. A restaurant, for example, isn't going to attract an angel investor because the growth potential just isn't there. But a manufacturer with an innovative new product just might catch an angel's eye. Angels also are likely to seek an active role in the company -- for example, as an adviser or board member. That's why angels tend to invest their money in local companies.

How Much Angels Invest

The typical angel investor is looking to turn a modest stake into a lot of money -- a return of 10 to 20 times her initial investment, says Tom Taulli of "Bloomberg Businessweek." In 2007, according to research cited by "The Wall Street Journal," there were more than 57,000 angel deals in the United States, with an average investment of about $450,000. Taulli reports that many angel groups invest even less: $25,000 to $50,000 per company. Compare that with venture capital firms, which often have hundreds of millions of dollars to work with and tend to invest in the $5 million-to-$10 million range.

How to Find an Angel

One way to find an angel investor is by active networking within the local business community. Jennifer Lawton, an entrepreneur who has been involved with several successful startups, wrote in "Inc." magazine that an entrepreneur should look at every person he knows or meets as a possible lead on an angel. If people don't have money to invest, maybe they know people who do. Meanwhile, angel groups have formed an association, the Angel Capital Association, whose website maintains links to groups around North America. Finding an angel is no guarantee of landing an investment, of course. If a company doesn't have a marketable idea and a plan for solid growth, angels will say, "No, thanks."

References

• "The Wall Street Journal"; What's an Angel Investor?; Colleen Debaise; April 2010
• "Inc."; Who Exactly Are Angel Investors?; Guy Kawasaki; December 2000
• "Bloomberg Businessweek"; How Angel Investing Works; Tom Taulli; October 2008
• "Inc."; Making Friends - The Name of the Angel Game; Jennifer Lawton; February 2000

Resources

• Angel Capital Association: Homepage