Angel investing 101 

What is angel investing and how does angel investing work? Is this type of investment reserved for wealthy individuals, or can anyone get into angel investing? What do angel investment opportunities look like and how do you start on angel investing? These are some of the questions that could arise whenever you hear about angel investing. 

For investors, angel investing can be a way to fund up-and-coming businesses that may provide a higher rate of return than other traditional investments. As for entrepreneurs, angel investing can be an excellent way to get funding for their startup. In some instances, angel investors may also provide valuable industry knowledge and contacts as well.   

In this article, InvestmentNews explores angel investing. Whether you’re interested in it as an investment or to get funding, read on to know more.  

What is an angel investor? 

An angel investor is usually a wealthy private investor who is chiefly concerned with financing small businesses or startups in exchange for equity. Many angel investors are accredited investors. They can also be current or former entrepreneurs themselves. What attracts angel investors to small businesses is the potential for huge returns from a relatively small initial investment.  

They are quite different from other investors like venture capital firms that use an investment fund for startups. If angel investors are individuals, they typically use their own money. 

In addition, angel investors can be less demanding of startups compared to venture capital firms.  

While VC firms have good judgment and may agree to finance startups with large sums, they prefer to have a substantial ROI within a short period.  

In contrast to VC firms, angel investors are more open to financing startups with smaller amounts and can agree to a longer period to receive their ROI. Angel investors can also be more flexible with compensation – they may accept a stock IPO or share in the profit if the startup is sold to a larger company.  

Here’s a video on the fundamentals of angel investing, explaining what angel investors are about, and the freedom they enjoy when making investment decisions:  

What is an angel investment? 

An angel investment is one that gets funding from an angel investor, usually in exchange for a percentage share in an entrepreneur’s startup. Most angel investments nowadays are startup tech companies that specialize in emergent technologies, so there is the potential for massive growth and significant returns.    

Angel investors are typically high-net-worth individuals, so the average initial investment can range from $25,000 to $100,000. 

How much ROI can an angel investor expect? 

The average return on investment that an angel investor can expect to earn nowadays is around 27%. This means that they can double or triple their investment, typically after 5 to 7 years.  

Angel investing is a high-risk, high-reward type of investment. It’s possible for angel investors to get returns of 10 times their initial investment or more. It’s also possible to lose their entire investment.  

Some angel investors can and do ask for more equity stake but for less ROI, but other angel investors can be open to other terms. Most angel groups are aware that very few startups move from a Series A and succeed, so they are cautious enough to make smaller investments.   

Case study: Mike Markkula and Apple 

Investors with the foresight of Mike Markkula will tell you that angel investing is worth it. Investing was not something he did casually. After making millions selling tech stocks, Markkula decided to retire at 33. He then chose to invest his money and lend his expertise to tech startups.  

As a former marketing manager of Intel and Fairchild Semiconductors, he also had a fair amount of knowledge and experience in electronics and saw the potential of the Apple personal computer.  

That’s why he invested $91,000 of his own money and secured a $250,000 loan from Bank of America. Through that initial investment, the equity he bought in Apple is worth $1.2 billion today.  

The shares and expertise he possessed let him serve as the company’s first Chairman and its second CEO since 1977. It’s safe to say that it wasn’t a bad investment at all. 

The pros and cons of angel investing 

As with any investment, investors and entrepreneurs should look at the possible benefits and drawbacks to angel investing. Here are the pros and cons of this investment type: 

The pros  

There are a few benefits to angel investing – there’s funding (which need not be paid back) and valuable resources and contacts. Let’s discuss them in more depth: 

1. Funding does not have to be repaid 

This is a welcome advantage for entrepreneurs and startups. An angel investment or funding does not require the recipient to repay the angel investor. Depending on the arrangement, most angel investors do not expect to get the money back – at least not in the same way or amount. Angel investors often prefer to get an equity stake in the company, especially if they believe that the company’s value will increase substantially over time.   

Perhaps the only time when an angel investor expects to be paid back is if the parties agree to a new business loan. In this arrangement, the angel investor gets their money back – with interest – after a specified time.  

2. Angel investors are less risk averse 

They’re more willing to put up large amounts of money into the startup, since they understand the risks involved. Angel investors can be more generous and forgiving than conventional investors like banks or VC firms.  

3. Angel investors may provide other valuable resources apart from money 

Angel investors are usually entrepreneurs themselves, with years of experience in launching successful startups. Apart from giving the financial support entrepreneurs need for their startup, they can lend their expertise and provide invaluable industry contacts. Sometimes the investment network an angel investor brings to the table can be more beneficial for the startup’s growth.  

The cons 

Just like any form of investing, there are some disadvantages to angel investing:  

1. Angel investors can take an active role in the startup 

Because they get a share of the company in exchange for funding, angel investors typically make being part of the company’s management part of their terms. In cases where an angel investor may have a different opinion on how to operate or grow the business, this can cause unnecessary friction.  

2. Angel investors may place undue pressure on startup owners 

While most angel investors know the risks and the time it takes for a startup to find its bearings and become profitable, some prefer a quicker turnaround time. 

If this is the type of angel investor that a startup invites, company owners and other shareholders may find themselves on the receiving end of unwarranted pressure. This can be stressful in the early stages of growing the company.  

3. Business owners risk losing control 

When one or more angel investors are invited to invest in a startup, there can be a loss of control. This is especially true if one angel investor is given a larger share, or several angel investors are given minority shares. Angel investors often ask for anywhere from 10% to 50% ownership in the startup they’re investing in.  

For entrepreneurs, raising capital can mean giving up a significant number of shares in their company. They could give up even more when they turn to equity financing that dilutes the value of their own shares. 

4. Knowing the right investment takes a lot of research and due diligence.  

For the wealthy, angel investing is not as easy as having some extra money to invest. Not knowing which startup company to invest in and not doing some research on the company is a sure way to get scammed. To get the best possible ROI when angel investing, it’s crucial to do research on startups that have real potential of becoming huge, profitable businesses. Tech startups, for example, show great promise for angel investors.  

This video from CNET shows some of the technologies that angel investors may become excited about in 2024. As an angel investor, you may try to invest in a startup that’s venturing into quantum computing or into any of the other tech featured in the video:  

 If you’d like to revisit some basic principles before diving into angel investing, read our guide on investing for beginners. 

Is the practice of angel investing legal?  

Taking on an investor who will accept some equity in exchange for money to grow the company sounds like a gray area, but it is perfectly legal. However, some conditions must be met.  

US Federal law states that equity in a company or securities cannot be sold unless the company issuing the shares is a registered company. But for angel investing, there are certain exceptions – if an angel investor is an accredited investor, then this is one exception. So, it’s legal for an accredited investor to loan money to a startup in exchange for shares.  

Generally, an angel investor is considered an accredited investor if they meet these requirements under the Securities Act of 1933:  

• has at least $1 million in assets  
• has earned at least $200,000 in income in the past two years 
• if a married couple, they must have a combined income of $300,000 

How do you find angel investments?  

You don’t have to work to build a network of angel investors or make a huge effort to find startups if you’re looking to invest. As an angel investor, here are some ways to find angel investments/startups:   

• check LinkedIn: you can easily find startups by typing in keywords like “tech startup” or “CEO” in the site’s search bar. You can sign up for free, but you may have to subscribe to be able to contact the people you’re searching for.  
• check online networks: look up angel networks online, like (what else?) but the Angel Investment Network.  

• use networking apps: for example, an app called angellist.com matches angel investors with startups looking for funding 
• check local business organizations or business schools: startups may list their companies at local business schools or organizations. For those looking for funding, some angel investors may list their contact details and be open to business proposals from startup owners who need funding.

Is angel investing worth it? 

Angel investing has advantages and disadvantages for both the angel investor and the entrepreneur.  

In an angel investment, it would be best to hire a corporate lawyer who is familiar with accounting principles and the nature of the business in question. That way, the lawyer can help draft an investment contract with terms and conditions that are beneficial to both parties.  

This can be a great investment opportunity if the investors do their due diligence and are willing to take reasonable risks. Through angel investing, entrepreneurs can also benefit if they secure enough funding by offering a fair share of equity in their company. 

Read and bookmark our section on Alternatives for articles on angel investing and other unconventional investments.