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Angel investing is a way to raise capital to launch or grow your small business without incurring any debt. Instead of obtaining money from a lending institution, you get it from a wealthy individual, or group of individuals, who provide capital in exchange for an ownership stake in your company.Having an angel investor may sound like a sweet deal, and many successful businesses got their start that way. But there are also a number of drawbacks to this type of equity funding. Here’s what you need to know before you try to find angel investors for your business.
What Is an Angel Investor?
Angel investors are typically high-net-worth individuals who fund startups or early-stage businesses in exchange for equity. Many are accredited investors, which means they have a minimum net worth of $1 million or at least $200,000 in annual income.While some angel investors work by themselves, many form “angel groups” that analyze businesses and invest together. This allows them to pool resources and make larger investments. Recommended: 13 Ways to Fund a Startup in 2023
What Does an Angel Investor Look Like?
Many angel investors are accredited investors. However, an angel investor can literally be anyone. This means the money needed to start a business can come from:
Family members
Friends
Work associates
Neighbors
Strangers who support your vision
Some angel investors may make only a one-time investment of a few thousand dollars, while others may make ongoing contributions to help a new business with its capital needs. It’s not unheard of for an angel investor to contribute millions of dollars to a startup.
Do Angel Investors Have to Be Accredited?
No, but many financial advisors believe an angel investor must be accredited. To receive accreditation, investors need to have an annual income of at least $200,000 or a net worth of $1 million, excluding their primary residence.
What Are the Pros and Cons of Angel Investors?
Pros of Angel Investors
Cons of Angel Investors
Accept more risk than traditional lenders
Can take a lot of time and effort to find an angel investor who is willing to invest in your company
Have a vested interest in your success
May have high expectations regarding growth and profits
Often have valuable industry connections
May want to have a say in how you run your business
Doesn’t involve taking on debt and paying interest
May cease delivering funds if they don’t like the direction your business is going
Often comes with mentorship and guidance
May want a high percentage of equity
Pros of Angel Investors
Angel investors are different from a traditional lender. They typically don’t care about your credit scores, personal financial situation, or business assets.The only things that interest them are, typically, your business plan and your ability to execute and bring in returns. Therefore, while a traditional lender wants to see things like collateral and a positive history with credit, an angel investor often just wants to know what your idea is and how much you need to make your vision come to life. Even if your venture is unconventional, such as a lean startup, you may have success with an angel investor who understands what you’re trying to do. Because many angel investors were once running startups themselves, they can be more forgiving of any setbacks and may even be able to mentor you through rough waters. This perhaps is the greatest gift angel investors offer: free one-on-one lessons in business and how to survive tough economic situations.
Cons of Angel Investors
While angel funding is not debt with interest, it can potentially cost more than interest that comes with small business loans because you’ll need to give up a portion of ownership in your business and, in turn, share your profits down the line. Once they put money (typically their own) into your venture, an angel investor may put pressure on you to achieve a certain rate of growth or amount of earnings. In addition, the investor may want to have a say in all of your business decisions, or even try to micromanage your business. If the investor doesn’t like the way your business is going, they might potentially stop providing any funding.
How to Find Angel Investors in 3 Steps
Knowing how to find an angel investor can be the first step to getting your business the funding it needs. Luckily, you should be able to pitch to both online and local investors. You just have to know where to look.
1. Use websites to connect with angel investors
There are numerous angel websites online, and many have very specific missions, such as small retail businesses or women-owned businesses.
2. Network with investors on social media
To network with local investors, one of the best things you can do is to become immersed in your local community. Become friends with other small business owners to find angel investors. Join online small business groups for your area. If there is a local trade organization, join it and go to every meeting. If your city or county has any trade fairs, make sure you attend those as well.
3. Explore community backers
It’s also a good idea to visit your local business development or economic development centers and ask if there are any angel investors or angel networks in your area. It’s possible that a community outreach coordinator may be able to point you in the direction you need to go. In fact, a network may even meet regularly in one of those community centers. Recommended: Pre-Seed Funding vs Seed Funding
What Are the Attributes to Look for in an Angel Investor?
You need to work with investors who have experience in your industry and realistic expectations. Seasoned people are what’s required. Those are two of the most important factors. Other things to look for are ability to be a team player and cash for possible future rounds of raising money.
Alternatives to Angel Investment Funding
Angel investors aren’t your only option for getting the capital you need for your startup. Here are a few alternatives.
Small Business Loans
There are many different types of small business loans, including bank loans, business lines of credit, SBA loans, and online business loans. While banks will typically only lend to businesses that have been established for two years or more, online lenders may be more flexible.
Startup Loans
Startup loans may not have the strict criteria for time in business that other business loans do, and you may be able to secure funds before you’ve even launched.The U.S. Small Business Administration (SBA), for example, offers a microloan program for small businesses looking to start or expand. Microloans are also available outside of the SBA program through nonprofit and for-profit lenders. Often, these lenders focus on giving opportunities to minority business owners and startups in underserved communities.
Crowdfunding
There are numerous crowdfunding sites, where anyone (not just professional investors) can contribute toward a new business project, product, or service. While it can take time and effort to create a compelling campaign, you typically don’t have to give up equity with crowdfunding. Instead, you may need to provide a token of appreciation to donors or investors, like early access to your product or a t-shirt with your startup’s logo on it.
Business Loan Rates
Angel investors can provide the funding (and, in some cases, guidance) you need to take your business to the next level, but there can be hidden costs. If you’re interested in exploring other funding options, Lantern by SoFi can help. With our online debt financing marketplace, you can explore small business loan options without scouring the web or making any type of commitment. With one short application, you may be matched with a loan option that meets your company’s needs and qualifications.
Frequently Asked Questions
Where do you find an angel investor?
What percentage of a business do angel investors take?
How hard is it to get an angel investor for your business?
Photo credit: iStock/kupicoo
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About the Author
Lauren Ward
Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
