Angel Investor

As an angel investor myself, I see every day the impact that this type of funding has on the ultimate success of a startup. Research shows that angel funding gives startups a 25% higher probability of survival than companies that don’t, so it’s no surprise that founders seek angel investors as a primary source of this kind of funding. 

An angel investor is a High Net Worth (HNW) or Ultra-High Net Worth (UHNW) individual with over $1 million in liquid assets who backs early-stage startups with their own money, usually in exchange for equity in the company. They also take a guiding role in the formation of the company, offering their expertise to the founding team. In my eyes, this mentorship and guidance is as, if not more, valuable than the actual financial investment an angel investor makes.

When you’re getting a brilliant, world-changing idea off the ground, you need funding. There’s no way around it. While family and friends can provide supplemental funding at the start, successful startups need a substantial injection of cash to get the ball rolling. As an angel investor myself, I see a lot of young startups struggle to understand how this type of funding works. Here’s what you should know about angel investors and how to secure angel funding:

What Are Angel Investors?

The term angel investor was born from the Broadway theatre, affectionately characterizing wealthy individuals who used their own money to fund theatrical productions. Today, angel investors seek early-stage startups in the pre-seed funding and seed funding rounds. Investor types vary for series a, b, and c funding. They typically have an interest in entrepreneurship, with many having led successful enterprises themselves.

Angel investors often have gained accredited investor status, though it’s not a requirement in order to be one. The SEC defines an accredited investor as someone with a net worth of $1 million or more in assets, someone who has earned $200k or more in income for the two prior years, or a married couple with a combined income of $300k. 

An angel investor looks for an innovative idea, a great product, a dedicated team, and a good product/market fit that could potentially bring an ROI of ten times their initial investment over the first five years. There’s a lot of inherent risk in angel investing — these are young, unproven companies — so an angel investor has to be in a financial and psychological position to withstand that risk.

How Angel Investor Funding Works

Angel investing isn’t one-size-fits all; my participation will likely look fairly different in any given investment. For example, an angel investor may fund a company as a one-time investment, helping the startup get its footing, or may commit ongoing financial support to carry the business through the often difficult early stages of development. Angel investor funding is usually the primary type of funding for early-stage startups as other funding types may be more predatory or intimidating. Angel investor funding promotes innovation, which then turns into economic growth for both the startup and the angel investor – a win-win. 

How Is Angel Investor Funding Different From Other Types of Funding?

Wondering how angel investor funding is distinct from other types of funding, like venture capital funding, crowdfunding, and seed capital funding? Read on to learn more. 

Angel Funding vs. VC

When it comes to angel investors vs venture capitalist, angels invest their own money. With a VC, investors pool their money, which is managed and invested by specialists. Angels invest earlier on in smaller startups, while VC firms tend to hold out until series funding rounds. Angel investors like to stick to areas of personal expertise, offering hands-on mentorship and guidance, while personalized aid from VCs is harder to come by. VC funding may also come with other strings attached that can reduce a founder’s level of control in their company, such as board seats.

Angel Funding vs. Crowdfunding

Where angel funding is typically equity-based, crowdfunding sometimes uses a rewards-based approach instead. Crowdfunding can also be easier to find, as attracting an angel investor can be time-consuming. Crowdfunding platforms streamline this process. However, funds are limited with crowdfunding, and many companies will still need angel investing to fill their financial gaps. 

Angel Funding vs. Seed Capital Funding 

Seed capital and angel funding both serve a common purpose, though they vary greatly in amount. Seed capital comes from people the founders know, and it’s normally in smaller amounts. Angel funding comes from experienced entrepreneurs who can contribute more due to their high net worth. 

Finding The Right Angel Investor

Keep these considerations in mind when searching for the right angel investor fit:

  • Industry Knowledge – From industrial automation to fintech, the right angel investor will have extended experience and knowledge within your industry. They have been there, done that, and know how to avoid common pitfalls. They should also have a proven track record of funding successful startups. 
  • Network Size – A good angel will have a strong investment and business network that you can tap into for additional capital as well as supply chain management partners and even potential customers.
  • Personality – Do you get along with them? Would you mind having them as your ‘boss’? You’ll likely be working fairly closely in the early stages of your relationship, so make sure it’s someone you generally like. 
  • Rational Advice – Angel investors, by nature, are risk-takers. But their advice should be calculated, reasoned, and rooted in experience and analysis. 

How to Get Angel Investor Funding

Not every angel investment deal has the same process, but they will likely share similar elements. Here’s how angel investor funding works:

  1. Find angel investors. Startups typically find angel investors through networking, startup accelerators, or angel investor scouting. 
  2. Pitch your opportunity. A pitch can be informal, sitting down at a coffee shop, or organized with a formal slide presentation. A good pitch should relay a complete and compelling overview of your idea and business plan in a limited amount of time. 
  3. Go through the due diligence process. If they like your idea, most angels will undertake a significant due diligence review before investing. In this process, they’ll ask detailed questions, verify assumptions about the product and business plan, and assess any avoidable mistakes. It may include personal research, meetings, and reference checking. 
  4. Go over terms and sign closing documents. Then, you’ll go over prospective deal terms with the goal of a mutually agreeable set of terms, documented in a term sheet. You may still need more money to fill the funding round, which can begin the process of deal syndication to find additional investors. Once the round is completed and the termsheet is done, definitive legal documents will be drafted and a closing package will be prepared. 
  5. Get access to angel funds and begin mentorship. Once all is said, done, and signed, your angel will cut checks and will begin mentoring your startup in its earliest days. 

Top Angel Investor Funding Disruptive Businesses 

Steve Macdonald has been funding disruptive, game-changing businesses since 1999 with the founding of his company TechHealth. Since then, Steve moved on to starting his own angel investing firm, MacDonald Ventures, where he continues to pursue his passion for innovative startups. 

Steve takes a unique, rebellious approach to investing. He learned through adversity to follow his gut and he does not back down from a challenge. In fact, when he’s looking for early-stage startups to invest in, he’s looking for solutions to the biggest issues our modern world faces. He uses his decades of experience, financial investment, mentorship, and boundless drive to help startups thrive as they develop the world’s next revolutionary technologies. 

With over $400 million in exits in companies he founded, Steve knows a winning idea and company when he sees one. 

A Strategic Match for an Innovative Tech Startup

Tech angel investor funding is an ideal match for an innovative, tech-driven startup. You can utilize an angel investor’s wealth of experience and knowledge to develop the next cutting-edge technology while benefiting from their personal financial investment in your company. If you have an idea for the next best thing, learn more about MacDonald Ventures, founded by successful angel investor Steve MacDonald, for your early-stage funding. 

Angel Investor Funding FAQ

Angel investments are less risky than debt financing. It does not need to be paid back if the startup fails. An angel investor looks for startups that align with their personal values and experience, offering the benefit of hands-on guidance and mentorship.

The main drawback of using angel funding is losing some control of your company. Unlike with other funding, an angel investor becomes part-owner and will have opinions on how the business is run. They’ll also receive some of the profits when the business goes public or is sold.

It depends on the individual investor, but yes, angel investors are more likely to fund prototypes that show the startup has made some progress prior to their involvement.

Angel investors are less likely to fund an idea alone, as they want to see some effort put in on the founders’ part as well as information such as market fit, etc. 

After the angel agrees to funding, you’ll work your way through the process above. Once you receive the funding, your angel investor will work with you on business development and will expect you to deliver on the promises made in your pitch. They’ll be looking to see that you hit your development milestones and projected sales numbers.