What Is an Angel Investor

An angel investor, or a business angel, is a type of private independent investor who is ready to invest their personal funds in some startup, even if it is at the seed stage.

The concept of “business angel” appeared by chance, because such an investor can be compared with a loyal sponsor or even a benefactor. These businessmen are aware in advance of the minimal success chances for a future project, but they still take risks.

Angel Investor Definition

An angel investor is a private venture investor providing financial and expert support to companies in the early stages of development.

When a new startup starts raising funds for its “million-dollar idea,” it has several options:

  1. Bank loan. But for this, it needs to be a registered legal entity, which has been on the market for many years and wants to receive financing for a new direction in business.
  2. Venture funds. In this case, one must be prepared for some bureaucratization of processes and expectations.
  3. Business angel. The most common and best option. In the case of an angel investor, there are more chances to receive a financial infusion. The main point here is that the interests and goals of the startup and the angel are the same.

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History of Angel Investors

Business angels had existed long before the angel investor definition appeared. For example, in 1874, Thomas Sanders and Gardiner Greene Hubbard invested in Alexander Bell’s telephone company. In 1878, entrepreneurs John Pierpont Morgan and Spencer Trask funded Thomas Edison's electricity developments. In 1903, Henry Ford attracted 40 thousand dollars from five private investors to open a company.

Due to the lack of a unified methodology, estimates of the number of business angels and their role in that period are very different. The most restrained researchers estimated the number of investors in the United States at 100,000 people, and the volume of investments at $5 billion per year. Others reported 720,000 private investors who invested about 55.7 billion dollars in 87,000 companies. According to the most daring estimates based on sociological research in 1983, by this time about 2 million families directly invested up to $300 billion in private companies.

In 1987, William Wetzel estimated the total investment portfolio of business angels at $50 billion - twice as much capital in managing venture funds at the time of the study. He suggested that every year private investors invested in 20,000 companies while venture funds supported from 2 to 3,000 companies. An obstacle to the study of angel investments was the inability to determine the boundaries of the informal market and compile a representative sample of investors who do not advertise their activities.

According to the Center for Venture Research at the University of New Hampshire, in 2002-2009, business angels were investing about $21 billion in 50,000 companies annually, and 2010-2013 were marked by significant market growth. According to the Center, in 2013, about 298,800 private investors invested $24.8 billion in 70,730 new companies in the United States.

As for the United Kingdom, the 2009 study by NESTA (National Endowment for Science, Technology and the Arts) found an average of 5,000 angel investors in the UK with £42,000 per investment. By 2015, angel investments increased with the average number of 5, as compared with 2.5 in 2009.

Business angels have played a role in the formation of many modern corporations. Richard Kramlich was the first to invest $22,500 in the enterprise of Steve Jobs and Steve Wozniak - the future Apple corporation. In the UK, Anita Roddick, founder of The Body Shop, was unable to get a loan to open a second store in 1976, and car dealer Jan McGlynn invested £4,000 in her business in exchange for half the company.

Angel Investments

Historically, business angels have been the main source of external financing for new companies with the potential for rapid growth. They help startups overcome the stage when the amount of resources necessary for development exceeds the capabilities of the founders, but is not big enough to interest an investment fund.

Business angels invest in companies directly and operate with their own capital. An angel can invest not only in a finished project, but also in an idea that is impossible for an institutional investor. In the portfolio of a business angel, small investments prevail in number and total volume. Often angels invest together, pooling resources and reducing individual risks.

Sociological studies indicate the consistency of the portrait of an average business angel - a man with a university degree between 45 and 65, with entrepreneurial or managerial experience.

Venture Capitalist vs Angel Investors

A significant difference between a venture capitalist vs angel investor is the degree to which they participate in the business. Venture capitalists most often only allocate funds for the project and do not interfere with the activities of enterprises. At the same time, business angels expect not only to make a profit, but also to directly participate in all processes. The desire to help and influence the course of business development can be considered both an advantage and a disadvantage from the point of view of the startup founder.

And the most important difference between ventures and business angels is as follows: the former invest in the project, and the latter invest in the idea and people. Ventures invest objectively, according to the rules, whereas angels invest subjectively, only in those projects and ideas that they like and understand.

Angel investments are often described as “smart money”: angels are more willing to support projects in which they can apply their own experience. Personal involvement and expert knowledge represent the fundamental difference between business angels and other private investors. Among active business angels, there are many entrepreneurs who attracted external financing in their own projects.

Wrapping Up

Now you are aware of what is an angel investor. In addition to the angel investor definition, you can find the definitions of other financial and business terms in our specialized dictionary at Monfex.com.