Angel Investor

Angel investor, alternatively referred to as private investor or business angel, is an affluent person who extends financial facilities for startups and entrepreneurs, often in return for partial ownership of the business. The assistance of this investor can be non-recurrent, or consist of several payments allowing to support the firm during its development phase.

Historical background

The term "angel investor" came into view at the outset of the 20th century in the United States to allude to wealthy entrepreneurs who are willing to invest monetary means in Broadway productions. Directors from downtown, while launching a new performance, turned to wealthy uptown residents for financing. In fact, these investments were quite risky, as the angel only made a profit in case of production success. 

One more theory is that the concept was first mentioned in relation to private investors who put up the capital in prospective venture programs in the American IT sphere. The first individual whose groundbreaking business proposal was funded by an angel investor, became the famous Eugene Kleiner, the U.S. engineer.

Essence of the concept

Angel investors are prosperous entrepreneurs who have accumulated enough money to invest, as well as knowledge, time and experience. As a rule, the subject of their funds placement is startups at the initial stage of development. Notably, angel investors are ready to take on associated risks and act as mentors for their projects. 

It is beneficial for entrepreneurs to buy out a share in the project, or receive a certain percentage of the startup's revenue. With a worthwhile injection, investments can quickly pay off. 

In general, angel investors choose 1 or 2 business plans out of the scope offered, increasing focus on the potentially gainful ones. There is a belief that reasoned venture financing must generate at least 50-70% annually. On a large scale, the return takes place at the disposition of share units, or a stake in the enterprise. If the business proposal is advantageous, its value may considerably exceed the original investment.

Angel investors offer more affordable terms as opposed to other market players and lenders. The reason for this lies in fact that these private funders take a direct aim at the project itself, and not at business viability. Basically, angel investors are known as the opposite concept to venture capitalists. 

Venture capitalists

Both market players put the capital in high-risk forward-thinking projects, but the terms are varying. Angel investors, as a rule, stake only their own financial facilities, while venture investors, in contrast, combine in a fund that raises money from residents, or other corporate bodies.

However, the key difference between angel investors and venture capitalists lies in fact that the latter present a group of professional funds providers. Alternatively, business angels are the well-offs who prefer investing as a pastime or an indirect result of their activities. 

In reality, angel investors and venture capitalists are not mutually exclusive alternatives for a young entrepreneur. Moreover, these actors can be successfully combined: attract the first one at the initial stage, and then turn to a venture fund at the stage of product commercialization.

Obtaining the status

Business angels are entities who acquired “accredited investor” status. Of course, this condition is optional. Anyway, there is the SEC that establishes the terms for obtaining it. For instance, a net worth over $1 million in holdings, or incomings of more that $200,000 for two preceding years are prerequisites to fall into the category of accredited investor. 

Types of Angel Investors

There exists a huge variety of angel investors. All of these market players are divided by their personal characteristics and motives.

Let’s consider the key business angels:

1. Proactive investor. This approach tends to be used by sufficiently experienced funds providers who have already consummated a number of deals, and have, at some point, an entrepreneurial background. These investors can be actively engaged in the development cycle of an invested enterprise.
2. Manager. In a majority of cases, this is an ex-staff member of a corporation who, in addition to the investing process, is seeking for new employment.
3. Non-dedicated private investor.  This type is keen on a business plan or a pioneer product, following the aim to invest in an emergent firm.

Angel Investors in real life

History goes back to several wonderful instances of average investors turning into fortunate business angels. Initially, it was a high-profile corporation, Apple. The $91,000 once financed transformed into a $154 million capital for the angel investor. The other case, Thomas Ahlberg, who backed up $100,000 in Amazon, and received a profit of $26 million. Or, Ian McGlynn invested $4,000 pounds sterling, for which he realized a much higher return of 42 million pounds.