The universe of startup investors can be split into two categories: professional money managers and everyone else who wants to buy a piece of the tech startup equity pie.
Whereas venture capitalists devote themselves full-time to diligently deploying other people’s money into startup companies, angel investors are wealthy individuals who use their own money to invest in startups.
The checks angel investors write are probably smaller, usually ranging between $10,000 and $150,000. And since they don’t have a big investment fund behind them, angel investors are going to have fewer companies in their portfolio (relative to a traditional VC fund). Nonetheless, individual angel investors can be seriously helpful to have on your cap table. Between the investment opportunities and partnership introductions they can provide, to the hard-won wisdom that comes from being an experienced (and, by definition, successful) industry operator, angel investors are often as scrappy and resourceful as the entrepreneurs they back.
Angel investors are also likely to be among the earliest backers of your startup. Before you have enough traction to raise from pre-seed and seed-stage venture capital investors, building a bench of individual investors who can go to bat for your startup is probably your best bet at the outset.
In this article we’re going to explain the what’s, who’s, where’s, and why’s behind angel investors. The goal is to help startup founders identify the individual investors who can be most helpful as they get their startup off the ground. So without further ado let’s get into it.
Who can be an angel investor (and why)?
Angel investors are not a monolithic group. The population runs the gamut between that one rich aunt and her dentist friends, to successful founders and small business owners, engineers, academics, corporate executives, and even professional VCs investing their personal money apart from their venture capital firm.
They all have one thing in common though: as high net worth individuals, they have some spare cash to invest in startups. From a regulatory standpoint, any potential angel investor has to be “accredited.” (Raising money from non-accredited investors imposes significant disclosure and compliance requirements on your startup.) There isn’t a written test or merit badge awarded, but to qualify as an accredited investor—in the eyes of the U.S. Securities and Exchange Commission—you need to have a decently large amount of money, or hold some specific credentials.
- Have earned $200k or more over the past two years (and expect to make the same this year), OR
- Have a net worth of over $1 million (excluding the value of your house), OR
- Hold a Series 7, Series 65, or Series 82 securities license
Well… congratulations, you’re accredited. Achievement unlocked: You can now invest directly in startups or become a limited partner in an alternative investment fund (such as venture capital, private equity, or hedge funds).
What motivates someone to become an angel investor? Let’s start with the obvious: Angel funding is not charity, although it can certainly feel that way sometimes. Like with any other type of investment, there’s the hope of financial upside. Although the majority of startups fail and most of those that don’t may only end up with a 1–5x financial return, the small possibility of a 10, 50, or even 100x return is enough to entice folks to invest in early-stage startups.
That risky aspect of startup investing may also be part of its appeal. It’s not entirely unlike betting on horse racing. A certain type of person can find it thrilling. But the extremely risky nature of startup investing suggests that something other than a calculated, rational expectation of financial gain is also at play: for lack of a better word, emotion. As one example: for a successful founder, there might be a sense of nostalgia for the early tussle of company building, or a feeling of obligation to "give back" or "pay it forward." Rational or not, many angel investors derive some satisfaction from helping out entrepreneurs who are just getting started. This is good news for founders: enthusiastic investors are the best type of investors.
Finding angel investors
Start locally. If you live in a major(ish) city, chances are there is at least one local angel investor network. Most of these angel investment networks host events, office hours, and usually have a website where you can submit information about your startup.
Here are some other ideas:
- Keep an eye out for pitch events and go to them. Even if you’re not the one up on stage pitching, there are going to be investors in the audience. Use the pre- or post-event happy hour as a networking opportunity.
- Look into the alumni network of your university, or from universities in your area. Some of these university-related angel networks only invest in alumni, but others are open to the entire community.
- Use online services like AngelList or Gust to identify and start communicating with angel investors for free. These platforms can also help streamline the fundraising process by sharing your pitch with their user base and automating some of the paperwork. (Shameless plug: Capbase Connect shares pitch decks from companies built on Capbase with a network of hundreds of investors.)
- Don’t forget to use your own network. Other startup founders, old bosses, and other friends in your part of the tech industry probably know some angel investors. It never hurts to ask and get a warm introduction.
Since angel investing has become somewhat fashionable, most angel investors aren’t shy about putting “angel investor” in their Twitter bios or even list their deals as experience on LinkedIn. In other words, with a little bit of poking around on the internet, you’ll probably find a bunch of folks to talk to.
How to approach angel investors
When it comes to matchmaking between angel investors and your startup, just remember: Fit is foremost. It sounds obvious (because it is), but focus your time on investors who invest in your industry and stage of your business.
For investor outreach and establishing relationships with angels, context is key. As with most types of business relationships, the best way to get in touch with angel investors is through a warm introduction from a mutual contact. If a warm introduction isn’t possible, you can always try cold-emailing the investor. (If you want to learn more about how to do that, check out our article How to Get an Investor’s Attention: 6 Unwritten Rules for Cold Emails.)
As for what you should have at the ready when doing investor outreach, it’s the same materials you’d have ready when talking to professional venture capitalists. At minimum, you’re going to need a 1-line explanation of what your startup does, an expanded (1 paragraph-ish) "elevator pitch" explanation, and either a pitch deck or investor memo. (Learn more about the common pitching pitfalls in our article The Do’s and Don’ts of Investor Pitches.)
And, finally, all the normal rules of business communication apply:
- Be transparent with what you’re looking for, because nobody likes a bait-and-switch.
- Be honest about where your business is at, since misrepresenting the truth here could put you on the hook for securities fraud charges.
- Show up to the meeting on time.
- Send a quick thank you message with next steps (if any) afterward.
This last bit isn’t rocket science but you’d be surprised at how many founders flub the easy part.
What to expect from your angel investor relationships
If you do it right, angel investors can be some of the smartest money on your startup’s cap table. The money and vote of confidence they provide is great and all, but angel investors can add additional value to your company besides their cash.
Here are some things that angel investors can help with:
- Introducing your company to venture capitalists and other angel investors
- Helping your company find its first customers
- Identifying and recruiting advisors and executive talent
- Providing strategic advice (if their background is highly relevant to your startup) or acting as a more general mentor
That said, it all depends on how involved the angel investor wants to be. Some investors (especially those with lots of portfolio companies) want to be more passive—one of those "cheering you on from the sidelines" types—and that’s okay. Others really want to roll up their sleeves and help out. When you’re deciding who to take money from, ask potential investors about the extent to which they’d like to be involved in accelerating your company’s growth and make your choices accordingly.
- Angel investors are individuals who invest their own money into startup companies. They’re also most likely to invest in pretty early-stage companies, often before other types of investors feel comfortable coming aboard.
- In order to invest in startups, an individual must be an accredited investor, which is determined by meeting criteria around income, net worth, or having certain professional credentials.
- If you live in a city, chances are there’s a local angel investor network (or two, or more). There are other routes to meeting angels, like through alumni networks and via online platforms.
- Reaching out to angel investors is very similar to reaching out to venture capitalists and other types of investors. You don’t necessarily need a special playbook that’s specific to angel investors, as a group. (But you should tailor your outreach to establish a good fit with each individual angel investor you reach out to.)
- Angel investors should be some of the “smart money” on your cap table. Beyond the cash they provide they can unlock growth opportunities for your startup, provided that they’re able and willing to do so.
Written by Jason D. Rowley
Jason D. Rowley is Head of Content at Capbase. A former venture capital data journalist and researcher, he lives in Chicago with his dog Zeus.
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