Angel Investors: What Is Angel Investing & How Does It Work?

April 2, 2024
angel investors

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Every business or new venture needs help financially, without financial backing, one can’t run or even start a business. Because starting a company entails a lot of work and investment. For example, if a person wants to create a company that provides a service, they first need to develop the service before they can start making money. And to extend the service, one will need capital in various aspects.

However, there are many different types of funding in the startup world. One of the most popular and important ones is angel investing, given the role the investors play. Angel Investors play a significant part due to their relationship with the startup founders.

Having investors is essential because a person needs funds to scale. Every startup needs funds, to begin with because before developing their product, one needs money to hire people to build the product. Angel Investors also play an essential role in networking and how the startup grows.

Today, one can learn about what angel investing is. Read on to know more.

What Is an Angel Investor?

An angel investor is someone like a guardian angel but for a startup. When someone starts a new company and needs financial help, angel investors give them financial support to enter the market.

In most cases, an angel investor is someone with a high net worth who wants to support new businesses. They can be older businessmen looking to support younger startup founders. Angel Investors fund the startup in exchange for equity shares in the company. Equity refers to a partnership in the ownership of the company. It can be at any percentage.

Given that they get blocks in the company, they are significantly invested in how it works and check in regularly to see how it’s performing. However, they only work at a different startup. They look over how it’s doing. Their main goal is to increase innovation by funding bootstrapped startups.

The advantage of angel investors is that they don’t lay down limitations if they like what they’re doing. The meaning of angel investor itself refers to someone that helps them out when they need it.

Because they’re also high net worth individuals, it helps to have them within the functioning of a startup because they have experiences and connections when it comes to anything. They know how to solve problems and who to contact for what.

Angel investors act like their guardian angels watching over a person in the end. Now that one knows what an angel investor is let us move on to know more about their role.

Understanding Angel Investors

Angel Investors are people who want to invest in startups that are early stage. That is to say, they’re still new and have yet to find a footing in the business world. However, they want to invest in the early stages because they only do it if they see potential in something taking off. Angel Investing is risky because the startup is unsure of succeeding at that stage.

A person doesn’t know what might happen, but angel investors still take a chance and give them the money they need to start working and enter the market. Angel Investors are scarce, and sources show that only 10% of investments are from angel investors.

Because their angel investors are most people with capital with them and are looking for higher returns at higher rates, startups are the most straightforward option in that case as they also get to look over the functioning of the startup.

Angel Investors give the founders more favourable terms, unlike banks that loan them or other investors. Because angel investors are typically interested in what the startup aims to do instead of the number of customers, this occurs because, in most cases, angel investors themselves would have been businessmen that understand how the startup world works and what it is to run a company. And most importantly, how, sometimes, one needs to make sacrifices.

Sometimes, angel investors are also called informal investors because these are individual people and not organisations at large that are set up to be capital funders. They set up angel funds just for investments and make returns from them. They end up owning equity in the startup, so it’s more self-funded for startups because one of their owners is also the funder. Any angel funding also gives the startup founders a sense of support and backing that any business requires.

Origins of Angel Investors

Angel Investor didn’t start as a finance term. The term angel refers to the Broadway term angel, where a rich person would fund theatrical productions when the productions would have no money and are on the brink of shutting down. It was used on Broadway at the time, just like the term “patron” used in the performing arts world.

A wealthy person who is angel investor would come together with other rich persons to pool in money and raise capital for theatrical productions. The word “angel” was first used by Professor William Wetzel at the University of New Hampshire in 1978 to refer to these investors as angels because they’d support the theatre and save their productions.

1. Angel Investor in Different Industries

Angel Investors helped the theatre industry survive. The art industry survives because patrons subscribe to their work and help them stay. It gives the artists a sense of security to continue doing their work because it’s the work they love. Given its kind of industry, there may only sometimes be immediate returns.

However, in the long term, it gives results, and that’s what patrons help achieve. They help the artists to keep doing what they love. Moreover, patrons only subscribe to the works of artists they love and enjoy and would like to see more of. Similarly, an angel investor for startup is a patron that helps startups to keep doing the work to produce results in the long term.

They do so because they believe in the startup’s work. They become a patron of the startup and help them keep up the work by funding them. The fund gives the startup a sense of security which helps them produce results. Startups are risks that founders and investors take together based on an idea they believe will succeed in the market.

Founders can take risks and experiment with their startups because of the confidence their angel fund gives them. It also helps them with value in the market, as it attaches the particular importance of a brand to the startup. When a famous investor backs a startup, it opens up more gates for the startup as other people will believe them quickly too.

The game of authenticity and trust will help when it’s an angel investor. Therefore, an angel investor taking a startup under their wing shows the market that they’re worth something, which makes it easy for other investors to believe them too.

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Who Can Be an Angel Investor?

In most cases, startups benefit more from people who are angel investors than from other forms of funding that may be a lot more imposing such as private equity or venture capital investments. In the United States of America, the Securities and Exchange Commission says that for anyone to be an “accredited investor”, they must have a net worth of more than $1 Million in assets. However, this is optional, as anyone with a high net worth can be an angel investor.

1. Angel Investors and Startups

Angel Investors also fund startups through crowdfunds. Therefore, the most crucial requirement to be an angel investor would be the financial capability to invest and, two, the desire to help startups grow financially. Therefore, anyone with money and the willingness to use their angel fund can be an angel investor.

Suppose they’re someone with disposable income that they’d like to invest in and planning to move into angel support. In that case, it’s vital to seek advice from older angels who have been in the industry long enough to help them identify what’s worth investing in and what’s not. One could also partner with already existing angel funding groups that actively work with startups. Being in organisations or trusts with a skin in the game helps them learn things they can use to expand on their own later.

Actively develop a strategy in a way they get their money’s worth and seek clarity from the founders. It’s always good to stay on top of things. Especially if they’re someone naturally curious about innovation, look for more information within the industry and specific product industry. More than just seeing the financial predictions, business plans and calculations of a startup is needed to be able to decide on funding them.

Finally, if they’re an angel investor trying to fund through crowdfunding platforms, then be careful and cross-check every investment they’re trying to make. Please get educated about the startup and the founders before getting the funding to them.

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What Angel Investors Bring to the Table

Aside from financial aid, investors bring a wealth of resources, expertise, and support. Their involvement can significantly enhance the success and growth potential of startups.

1. Help Innovation

They’re actively helping founders build more and contribute to the economy. It helps inspire and innovate younger founders to take more risks when they know they have industry support. Angel funding typically allows startups to take more risks.

2. Experience and Expertise

Angel investors often have significant experience and expertise in specific industries or domains. They can provide valuable insights, guidance, and mentorship to entrepreneurs based on their own experiences as successful business leaders or industry experts.

3. Networking

Angel investors typically have extensive networks of contacts within their industries. They can introduce startups to potential customers, partners, suppliers, and other investors, helping to open doors and create valuable connections that can accelerate growth.

4. Strategic Advice and Support

Angels go beyond capital investment when they attach themselves to a startup. They often provide a holistic support system when they take a startup under their wings. They help startups mitigate risks and navigate challenges, provide mentorship by sharing actionable industry insights, and help them capitalize on opportunities.

5. Credibility and Validation

Securing investment from reputable angel investors can lend credibility and validation to startups. It signals to other investors, customers, and stakeholders that the business has potential and is worthy of attention and support.

6. Access to Resources

Angel investors may provide access to additional resources and opportunities beyond just funding. This could include access to office space, equipment, legal and accounting services, or specialized expertise that can help startups overcome obstacles and achieve their goals.

7. No Monthly Interest

Beyond this, angel investing also comes with benefits such as no monthly payments or interest. Other forms of loans are particular deadlines that one needs to stick to. Hence making it one of the biggest pros of angel investing as a whole. If one takes a bank loan, it doesn’t come with a free consultation and access to networks. With angel investors, however, it’s all included with a one-time investment from the angel.

Risks Associated with Angel Investors

1. Different Long-term Vision

If an entrepreneur chooses an investor with whom his company’s vision, mission and goals do not align, it can lead to conflicts and impact the company’s growth.

2. Rights

There can also be disagreements about rights and liabilities. Hence, it is essential to have a lengthy negotiation with an investor before accepting their money. An angel investment always comes with conditions. Or any investment for that matter.

3. Shared Authority

Companies that partner with angel partners may need to give up some amount of equity in their business. The entrepreneur is giving up a share of the company and its future profits in return for financial aid and resources. Some investors also often want a seat on the board or its equivalent.

4. Micromanagement

Angel Investors can be holding and expect a person to govern the company based on what they consider correct. It may not always work out in their favour and can create a rift. Ultimately, the level of interference or involvement depends on the dynamics of the investor-founder relationship and the specific needs and preferences of both parties. It’s important for founders to communicate openly with investors, set clear expectations, and establish boundaries to ensure a productive and collaborative working relationship.

Angel vs Venture Capital vs Private Equity

BasisAngelVenture CapitalPrivate Equity
DefinitionAn angel investor is commonly a high-net-worth person who funds startups at the early stages, with their own money, including a private investor, seed investor, or angel founder.Venture capital firms are a type of investment firm that fund and mentor startups or other young companies for the potential for substantial and rapid growth.Private equity means owning or having a stake in companies that are not publicly listed or traded. Private equity firms manage these investment funds on behalf of institutional and accredited investors.
Stage of BusinessEarly-stage startups are just ideas or prototypes.Invest in small businesses & startups, spanning various stages from seed to growth.Primarily mature companies or buyouts.
Size of InvestmentGenerally, smaller investments, ranging from thousands to tens of thousands of dollars,Larger investments, ranging from hundreds of thousands to millions of dollars.Typically large investments, often in the millions or even billions of dollars.
Type of InvestmentEquity financing, convertible notes, or simple agreements for future equity (SAFE).Equity financing, preferred stock, convertible debt, or a combination of financing instruments.Equity financing, leveraged buyouts, mezzanine financing, growth capital, and recapitalizations.
Investment TeamAngels often include successful entrepreneurs, former founders, or startups. Their main skills is understanding the role, sharing expertise, and knowledge, and networking.Venture capital investment is typically a mix of entrepreneurs and investment bankers or finance professionals.Private equity firms are usually ex-investment bankers and corporate development types, or seasoned corporate executives.
Level of RiskHigher risk due to investing in early-stage startups, but potential for high returns if the company succeeds. Angels often expect a higher return on investment.Venture capital is a high-risk, high-reward type of investment aimed at identifying the best opportunities and minimizing risk, investing in startups and early-stage companies.Private equity typically deals with established businesses with moderate risk as they have a proven track record and established operations.
Return ProfileHigh risk, high potential return.High risk, moderate chance of losing all money.Moderate risk, low chance of losing all money.
Industry FocusDiverse, ranging from technology, finance, and education to healthcare and beyond.Diverse, but often with a focus on high-growth sectors such as tech and biotech.Broad focus on mature industries like technology, manufacturing, and services.
Investment ScreeningFocuses on the founder’s track record, market potential, and product viability.Founders, market potential, scalability, margins, and market share potential.EBITDA, cash flow, IRR, financial engineering, and market position.

Sources of Angel Investing

Angel Investors and other funders, such as venture capitalists, have different forms of funding. Because it varies in its source, it’s important to learn this difference in source as it will help us understand different kinds of funding in the market.

The source of money for angels comes from their own wealth. Because an angel investor is someone that wants to help actively, they invest from their net worth. It can be from any asset. It can be from other forms of businesses that they run and make money from, or it can be from generational wealth.

Angel Investors perform these forms of funding through registered organisations such as trusts or subsidiary businesses. Angel funds are said to be more secure than other forms of funding, such as funding from venture capitalists, where a venture capital firm manages funds that are pooled money of others, and they manage it for them by investing and getting returns. Whereas angel investor means angel itself funding is their own money that they’re willing to invest by making active choices on their own.

Angel Investors work in many ways. Sometimes, they are high-worth individuals operating on their own by investing their money or asset, or they can also pool their resources and form trusts or other organisations that fund them.

1. Create their own Source

In a lot of cases, popular angel investors are CEOs or managing directors of conglomerates. There are also angel investors that make a group themselves and look for startups that require investments. In this case, however, they don’t function like venture capital firms that manage others’ money.

Angel Investors manage their own money. They pool resources to simplify the process by having a group organisation where many angel investors come together. There are also online crowdfunding platforms that startups use to raise funds. It’s a place where different investors come in and invest in a company at once in exchange for a stake.

2. Crowdfunding

Crowdfunding for startups has become popular, given how easy the process has become due to the internet. It is simply a different platform, but funding remains the same based on how much the angel wants to invest. Except with crowdfunding, there might be more angels than traditionally sourced funding from angels.

What Percentage Do Angel Investors Want?

Angel Investors work with various processes. Different angel investors have different processes and methods while dealing with startups. They only sometimes work similarly. Hence, a person can only sometimes predict accurate numbers as there is no predetermined stake. However, they don’t go for predominant stakes either because they’re only investing and not running the company.

They don’t meddle with the running of a business. But they do look over how they’re running the company and whether they’re worth their money. Sometimes they ask for a 20 per cent equity stake, and sometimes up to 25 per cent.

It’s never lesser than 20 per cent. Some investors may even ask for up to 50 per cent, especially in the early stages, because of the risk factors involved. Because angel investor is someone that has the desire for the startup to grow, they’d also want returns for the money they’re investing.

Angel Investors can be convinced by negotiating and meeting their standards. Angel Investors only want to invest their money, and a startup can only succeed with funding. Therefore, meeting their standards and securing funding is important, even if it means giving up a per cent of their equity. Moreover, most angels look for an exit when the startup starts to succeed. Hence, a founder can always buy them out when the business looks good.

Angel Investors want a percentage that a founder can’t accept, then they must look for other investors that can invest. But up to 25 per cent of equality is a good idea for someone who is an angel investor. It also shows the value they bring to the firm with their experience and contacts. One can always profit off angels non financially by using their networks, which will help startups succeed in different ways.


If a person were curious about how exactly angel investing works, it is hoped that the reader has found the answer in this article. There are many aspects to the startup world, and investing is one of the most important ones because only some can take off with adequate capital. Learn more about other aspects of the startup world in other articles.

Frequently Asked Questions

Who is the most famous angel investor?

Angel Investors are in plenty in India, many people are active angel investors. According to sources, in 2018, Rajan Anandan was one of the most famous angel investors in India. He’s known to have funded many startups across India and Sri Lanka and is also the Managing Director of Sequoia Capital, a venture capitalist firm that works with numerous startups at different stages. He actively invests in the areas of big data, digital health care, e-commerce, digital media etc. Other investors, such as Ratan Tata, also fund startups in the early stages. Given his experience in business, people look forward to having him as their angel investor.

How does angel investing work?

Angel investors are people who give money to new businesses and startups in need of funding. These are usually rich persons, who are often business founders & CEOs. They use their own money to buy a share of the company they’re investing in. Angel investing groups typically seek to acquire between 20 and 50 percent ownership of startups in their beginning stages.

What is the role of an angel investor?

Some of the role of an angel investor are:
1. Invest in early-stage startups in exchange for ownership equity in the company.
2. Offering mentorship, knowledge, guidance and networks to entrepreneurs.
3. Assisting in strategic decision-making.
4. Takes own risks associated with investing in early-stage companies.
5. Supporting the growth and development of the startup ecosystem.

How do angel investors get paid back?

Angel Investors are looking for long-term returns. When startups secure initial funding through angel investing, it’s at the cost of some equity shares that they end up acquiring from the founders. When the startup starts to succeed, they look for an exit and a return on its investment. To get the return, they sell the shares back to the company. Once they exit, they have the money they invested back and more because the startup would’ve succeeded and started making their own money. Or they may sell it to other investors that are interested in buying the shares that they own.

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