Takeaways
- Angel investors fund high-risk startup businesses to get them off the ground.
- Many angel investors are high-net-worth investors who specialize in startups.
- The average angel investor invests at least $26,500 or more in new businesses.
- Angel investors are usually former founders, CEOs, or industry experts.
- Angel investments can fund product launches, business formation costs, marketing campaigns, or early infrastructure costs.
What Is an Angel Investor?
An angel investor is someone who provides startup cash for a business in exchange for equity. Angel investors are a critical part of the investing ecosystem because they provide a much-needed cash infusion to startups during their early years of growth and expansion.
Angel investors are usually high-net-worth individuals and accredited investors who specialize in funding small businesses. Company founders articulate their business ideas, growth trajectory, and exit opportunities to angel investors. Angel investors typically purchase common stock in a startup and participate in later financing rounds.
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How Angel Investing Works
Angel investors got their name from the Broadway theater community. Wealthy individuals would fund performances and only get paid if the production succeeded. Since then, people have realized that this approach works for all types of businesses.
The hit TV show Shark Tank showcases how angel investing works. Newly founded and growing businesses pitch their ideas or products to angel investors. If the investor is interested, the business receives a cash investment in exchange for equity in the company.
According to the U.S. Bureau of Labor Statistics, over 20% of new businesses fail in the first year.[1] Small business loans may be challenging to obtain, especially if your business is high-risk or requires large upfront capital.
SBA loans also require regular monthly interest and principal payments, which can affect a startup’s cash flow. Unlike traditional financing routes, angel investments typically offer better terms. An angel investing equity is not a loan but a purchase of the business's equity. Angel investors are particularly aware that investing in startups is risky, but they hope to make an above-market return on their money as the company grows.
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How Much Do Angel Investors Invest?
Professional angel investors often invest cash in multiple businesses at a time. Not all angel investors are billionaires or multi-millionaires, as shown on Shark Tank.
The average angel investor writes a check between $26,500 and $37,000.[2] Angel investors can be family, friends, or even other entrepreneurs. However, they are usually high net worth and have allocated a portion of their investing capital to high-risk and high-return investment opportunities, like startup investing.
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When Do Startups Need Angel Capital?
Startups often need money during the pre-seed or seed stage when they haven’t established a significant, recurring, or stable revenue stream. Angel investing bridges the gap between the business getting up and running and when it starts making money.
Once the startup has a strong customer base, sales, and data, it becomes a better candidate to secure larger financing funding rounds from venture capitalists, hedge funds, mutual funds, or traditional business loans.
How Do Angel Investors Make Money?
Each equity investment agreement will vary depending on the angel investor and business. However, investors always look for avenues to earn a return on their invested capital. They typically make money in one of three ways:
- Dividends: An angel investor may receive a portion of profits, called dividend payments, that are distributed to shareholders. The board of directors must approve dividend payments.
- Acquisitions: If the startup is purchased, the angel investor receives a proportional payment based on the amount of equity they own in the business and the purchase price.
- Initial Public Offerings (IPO): Traditionally, if a company goes from being a private company to a public company, it goes through an initial public offering. The investors’ shares become much more liquid and valuable during this process. An IPO is considered an exit event for early investors.
Investing in startups is risky. In a report compiled by The Angel Capital Association, angel investors reported that 11% of their portfolio included a positive exit.[3] Despite that low number, the report shares that angel investors are optimistic because they are experiencing much higher rates of return than expected.
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How to Become an Angel Investor
55% of angel investors were previous founders or CEOs of their startups.[4] The relationship between angel investors and CEOs is often cyclical. Once the businesses grow and make money, the founders can use their earned capital to allow other companies to take off.
To become an angel investor, you don’t have to be a millionaire or former CEO. You must have five figures you aren’t planning to use anytime soon to get involved. Angel investors are usually individuals using their own money. However, they may use an entity like a Limited Liability Company, trust, or business to fund the projects to take advantage of tax benefits and legal protections. If the startup fails, angel investors lose their entire investment.
Angel investors often join forces to create angel groups or clubs. This allows individuals to combine their capital and invest more in exciting projects. These angel groups may be organized geographically based on the industry they want to invest in or investment sizes. Investors may also join a group to share experience, expertise, and opinions about prospective projects.
Is Crowdfunding Like Angel Investing?
Crowdfunding is a breakoff of angel investing. It allows businesses to receive small amounts of capital from individuals to fund their businesses and product ideas. Projects on these platforms are seeking smaller funding goals, allowing people to contribute amounts as small as $1. According to Statista, the average crowdfunding campaign in 2024 raised $9,350.[5]
Instead of equity, supporters may receive exclusive discounts or products to support the venture. Like angel investing, backers lose their investments if the crowdfunding project fails. Most crowdfunders view their investments as donations rather than investments they want to make a return.
Smart Summary
Angel investors are among the earliest formal investors in startup businesses, usually right after founders have self-funded the business or completed a “friends and family” round. Angel investing emerged around the 2000s with the dot-com boom. In recent years, fintech and healthcare have been popular industries for angel investors. Angel investors are vital to the funding ecosystem because they bridge the gap for startups and small businesses between bootstrapping and traditional financing.
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(1) U.S. Bureau of Labor Statistics. 1-year survival rates for new business establishments by year and location. Last Accessed January 13, 2025.
(2), (3), (4) The American Angel. The American Angel Campaign. Last Accessed January 13, 2025.
(5) Statista. Crowdfunding – Worldwide. Last Accessed January 13, 2025.
