What Is An Angel Investor?
Welcome to the vibrant world of startups: a fast-paced environment where innovative ideas are born and nurtured, and funding is the lifeblood that keeps these entrepreneurial ventures alive.
There are various avenues for securing capital (see: bootstrapping, friends and family, venture capital, accelerators and incubators, strategic partnerships, and more), but one key player of the funding game to consider is the angel investor.
Angel investors play a pivotal role in the startup ecosystem, often acting as the early champions of innovation and game-changing ventures.
But before we dive into the details, we'd like to take a moment to look at this wider world of angel investors through a unique lens and highlight the current state of the landscape. 2021 represented the highest recorded participation from women angel investors to date, making up 27% of Canada’s angel community. While this is a celebratory 60% increase since 2018, there is still a long way to go for an even split.
That said, let's walk through what defines an angel investor, their role in early-stage investing, and how they contribute to the success of startups.
Defining Angel Investors
Angel investors—AKA angels for short—are high-net-worth individuals who provide financial backing for early-stage private companies, typically in exchange for ownership equity in the company.
Angels invest their own money; they have the financial means to fund these high-risk, potentially high-reward new ventures and play a crucial role in helping startups get off the ground and grow.
Often successful entrepreneurs themselves, angels actively contribute to startups by offering their expertise alongside their capital. They serve as mentors and advisors, playing a crucial role in guiding entrepreneurs toward success while closely monitoring their investments for growth and viable exit strategies.
Typically angels are accredited investors, though they don’t have to be.
Accredited investors meet financial criteria set by relevant financial regulators to access exclusive securities. For a complete definition, see the Alberta Securities Commission.
Options for accredited investors are greater than for non-accredited, however, there are still options to invest for those who don’t meet the criteria, such as equity crowdfunding platforms (think: FrontFundr), consulting for equity, or special purpose vehicles (SPV)—check provincial regulations.
How Angel Investing Works
Angel investors prefer to get involved in the early stages of a company, from the pre-seed to seed funding phases. They generally fill the gap between financing from the friends and family round and venture capitalists.
The actual investment process will go like this:
Identification
Angel investors find developing companies through connections such as word of mouth, business and industry forums, conventions, or referrals. They will identify startups that align with their personal interests and expertise, often choosing industries they have expertise in to reduce risk.
Due Diligence
Promising startup identified? It’s time to conduct thorough due diligence. This process involves assessing the startup's business plan, management team, market potential, and financial projections.
Negotiation
Following the necessary step of due diligence, a term sheet or contract is drawn up, and angels negotiate the terms of their investment, including the amount of capital they will provide in exchange for equity or convertible debt.
Investment
Congratulations—the terms are agreed upon! From here, the contract is finalized, a legal agreement is signed, and the funds are released for the startup’s use. This capital is crucial for the startup to develop its product, scale its operations, or reach other key milestones.
Mentorship
As mentioned, many angels provide more than just investment capital. They often offer human capital via guidance, mentorship, and access to their professional network, helping the startup succeed.
Exit
The end goal for almost every angel investor is to, of course, cash out a profitable return on their investment when the startup achieves success. This can happen through an acquisition, an initial public offering (IPO), or other exit strategies.
The Role of Angel Investors
Angel investors serve multiple roles in the startup ecosystem:
Providing Capital
Everything we’ve mentioned: angel investors inject their own money into early-stage companies to help them get established. Their funding terms are often more favourable than those of other lenders, and the may be willing to invest in companies with less market potential or a less established management team.
Mentorship and Guidance
Recall the human capital we mentioned. With many angel investors being seasoned entrepreneurs or industry professionals, they have a wealth of knowledge and experience to act as advisors to founders, helping them navigate the challenges of growing a business.
Networking
Leveraging their unique experience and backgrounds, angels can introduce startups to their extensive networks of contacts, potentially opening doors to partnerships, customers, and additional funding sources.
Angel Investors vs. Venture Capitalists
At first glance, angel investors and venture capital (VC) seem similar: both fund young companies in exchange for a share of the business. But there are notable differences.
The first distinction being that angels and VCs get involved at different stages in a startup’s lifecycle. Angels are more likely to invest in an idea—friends and family, pre-seed, and seed stages—whereas VCs invest in all stages except friends and family.
Another difference is the source of funds. Angel investors invest their personal funds and manage their own money, whereas VC firms pool money from high-net-worth individuals and institutions to invest in high-potential startups. VC investors have a duty to their investors called limited partners (LPs) in a fund and often specialize by stage or technology focus.
Who Can Be an Angel Investor?
Aside from being individuals with the financial means and the willingness to invest in startups, angel investors also share some of these other key characteristics:
Entrepreneurial Experience
As mentioned, many angel investors have previously founded their own businesses or have worked in high-level positions within startups. This experience equips them with the knowledge and insights to assess the potential of new ventures.
Industry Expertise
Angels come from a variety of backgrounds, and many invest in startups because they are passionate about a particular sector. Thanks to this, they are able to make informed investment decisions within their areas of expertise—a valuable asset in guiding startups to success.
Mentorship Willingness
Angel investors aren't just sources of funding; their invaluable human capital, guiding and connecting founders to networks, can significantly impact a young company's growth.
Risk Tolerance
The stats say a lot: roughly 20% of startups fail in their first year, and around 60% will fail within their first three years. Investing in startups can be highly unpredictable and risky.
Angels should be comfortable with the inherent uncertainties of the startup world and be willing to accept the potential for financial loss.
Long-Term Vision
Unlike traditional investors who might seek quick returns, angel investors typically have a longer investment horizon. They understand that it can take several years for a startup to scale and become profitable.
Passion for Innovation
Angel investors are often driven by a passion for innovation and a desire to support groundbreaking ideas. They relish the excitement of getting in on the ground floor and being a part of a venture's journey from ideation to market.
Successful angel investors can look like anyone—from experienced entrepreneurs to business professionals to retirees with the resources and the willingness to invest in promising companies.
Whoever they are, an angel investor holds a significant place in the startup ecosystem, serving as a vanguard of innovation and change. Angels champion early-stage startups and contribute substantially to their success, catalyzing the transformation from groundbreaking ideas into reality.
We’re here to help you set foot on your journey to becoming an early-stage (angel!) investor—specifically through a women and gender-diverse lens to improve gender equality in the economy.
Learn more about our Financial Feminism Investing Lab and join us in the next cohort here.
*Please note that the information provided in this blog is for informational purposes only and should not be construed as investment or financial advice.
