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Angel Investors: A Primer


You've got to have money to make money, the old saying goes, and angel investors are one way to get the money needed to fund the growth of your business. But who are angel investors, and how do you get them to buy into your entrepreneurial dream?

This Quick Read will:

  • Define the types of angel investors
  • Offer four tips to develop solid, working relationships with angel investors.
  • Identify places to find angel investors

Legal and financial aspects of Angel investments are discussed in the Quick-Reads "Raising Capital in a Direct Public Offering" and "Raising Your First Outside Capital."


What are angel investors?

Angel investors are private investors who fund your business, usually in return for equity in the company. Unlike venture capitalists, angels investors are often motivated by more than financial gain, and angels may demand a smaller share of ownership and a lesser role in corporate governance. They are usually individuals who invest as a hobby or who invest to diversify their business or portfolio. Angel investments may be in the form of loans or loan guarantees or purchase of equity in the company. Like venture capitalists, angels look at companies with the potential for high-growth and rapid returns and often prefer investments in industries they are familiar with.

Angel investors may be connected to other sources of capital, either through their own resources or through others they know. The best angel investors also bring insight and expertise, offering a valuable perspective to your growing business.

While types of investors vary, distinct personality traits can determine the angel investor that is best suited to you and your company. Evanson and Beroff say in "Heaven Sent," [Entrepreneur, (January, 1998): 71-73)], that private investors fall into five categories:

  1. Corporate angels. These folks are former CEOs or managers at major corporations who took early retirement or were laid off. They usually have money to invest, and will contribute, in return for a job at the company.
  2. Enthusiastic angels. These people invest as a hobby. They rarely want a management role and seldom want to even serve on the board. They tend to invest a smaller amount, but often have contacts that translate into more money in the future. You will need to spend some time educating this kind of angel. They aren't likely to have industry expertise that will help your business.
  3. Entrepreneurial angels. These are entrepreneurs who often own and operate their own successful business. Like the good entrepreneur these folks are looking for a way to diversify their portfolios or build their existing business. They tend to invest only in businesses within their area of expertise. Their knowledge can boost your business.
  4. Micro-manager angels. These people are able to invest some serious money, from about $100,000 to $1 million and they want to know how it is being spent. These angels are personally wealthy, usually as a result of their own successful business ventures and most will ask for a seat on the board in return for their investment. Expect them to monitor your every move. They're likely to use their leverage on the board to bring about management changes if they are unsatisfied with the company's progress.
  5. Working or professional angels. This is a group of working professionals, doctors, lawyers and others, who are willing to invest in companies within their specified industry. They don't expect heavy involvement and rarely want a seat on the board, but they are worriers and impatient when it comes to returns on their investment. These angels are well-connected and can provide valuable industry knowledge.

Investors can be relatives or friends. Angels are anyone with money that they can afford to lose and are willing to invest in your business.

But before you start asking Grandma for money, keep a few things in mind. A business deal gone bad will sour family relationships. Make sure your family members understand the risks, and are clear about what they will receive in return for their investment.

Tips to develop solid, working relationships with angel investors

Whichever type of angel you find, experts suggest you do a few things to develop a solid working relationship.

Get your financial act together. You'll need to confirm the present value of your company and then decide what fraction of the equity you'll invite investors to own. You'll need a business plan to impress your potential investors and to be certain how much capital you'll need in each round of financing.

Outline the relationship before you take the money. Discuss expectations, your needs, what the angel wants in return, and the risks. You'll need to convince most investors that they're likely to gross at least a 25% annual return in return for the risk you're asking them to assume.

Do a background check. Find out how this angel works. Check references, and talk with other CEOs who have worked with him. If an investor seems unreliable, that could indicate future trouble. Review records to make sure there are no sanctions against your investor or problems with the companies he financed.

Develop the angels' exit strategy. Many angels are attracted to companies with an exit strategy in place. They want to invest, get a return on that investment, and get out. Put the exit strategy in place and your proposal will attract more interest. Ideally, your business plan should project enough earnings in a few years to buy back the angels' equity.

Where are the angels?

Finding leads on investment groups is easy; securing the money is hard. Even with angel investors you're still going to need to conduct thorough research, develop a business plan or presentation and proposal.

Once you're ready to start contacting angels, start looking close to home. Chances for funding are better if potential investors can visit your operation conveniently, both to be impressed before they invest and to keep an eye on their investment afterward.

  • Check the Chamber of Commerce. Many have venture capital groups. Those people can connect you to other investors.
  • Talk to professionals: Attorneys, accountants, doctors, bankers and others either know where the money is or can connect you with a specialist in entrepreneurial services.
  • Check out Active Capital (formerly ACE-Net), a service sponsored by the U.S. Small Business Administration that matches entrepreneurs with accredited investors.
  • Look in university entrepreneur programs. Often deans and professors are connected to interested angels. You can also get more information and make more contacts in university business development workshops and campus angel groups.
  • Join a trade association. Attend conferences and network to find out if there are any known investors who focus on companies in your area.

  • Seek a mentor/advisor who has succeeded in a business like yours. That kind of person is most likely to know where there
    are angels interested in your kind of business, and may even become an angel for your company.

  • If you are in manufacturing, work to develop close cooperative ties with your suppliers and distributors. They will come to understand your business, and since the more business you do with them, the more money they make, they may become interested in providing you with capital for expansion.

Once you get a lead investor to commit, the precedent makes it much easier to convince others to invest. The lead investor may even recruit other angels for you.


Family-member-angels funded Metro One Telecommunications, an independent voice-based directory assistance service for the wireless market in 1989. But when Patrick Cox started up his newest business venture Qsent, a data directory service providing updated information for businesses, he financed the first stage of business himself and turned to a professional angel investor for the second stage growth.

Cox said working with an angel who is familiar with business and investing was easier than dealing with family members.

"Professional angels are a little more sophisticated. They understand the ups and downs and risks and that allows them to give critical analysis and a different perspective. They can look from the outside in, understand your business and articulate what you want. An angel can validate or invalidate what you are doing."

Cox had met his angel during previous business dealings. He said finding the best angel is a matter of networking and building relationships.

Cox wouldn't release Qsent's earnings but the Portland, Ore. based business employs 85 people and has a 1000 percent growth rate. He expects Qsent to grow into a billion dollar company. "Angels are the best way to fund business growth aside from financing it yourself," he said.

"But we're working on sustainable growth. You've got to make sure you don't get ahead of yourself."

DO IT [top]

  1. Write down your expectations. List the qualities you need in an angel investor, aside from money. Do you need active board members, expertise, or simply to be left alone?
  2. Consider the types of angels. Which type would best suit your company and objectives?
  3. List five specific places to seek out those angels.
  4. Even if you are growing on Grandma's money or that of another relative, provide thorough documentation. Identify the risks and potential returns and set up regular meetings to keep family investors informed.
  5. Start looking for other angels. Attend the Chamber's venture group; ask your accountant or lawyer preliminary questions about angel investment contacts.
  6. Identify two potential angel investors and prepare for initial contact.
  7. Contact your first potential angel.



Angel Financing: How To Find and Invest in Private Equity, by Gerald A. Benjamin and Joel Margulis (Wiley, 2000). More for seekers of funding than for investors, despite the subtitle.

Attracting Capital from Angels: How Their Money—and Their Experience—Can Help You Build a Successful Company by Brian E. Hill and Dee Power (Wiley, 2002).

Internet Sites

"Angel Investors, Money From Heaven," excerpted from Where's the Money? Sure-Fire Financing Solutions for Your Small Business, by Art Beroff and Dwayne Moyers. (Entrepreneur Press, 1999)

Angel Investors, by Judith Kautz. Small Business Notes.

Q&A: Small Business and the SEC. U.S. Securities and Exchange Commission, 1999. See especially "Are There Legal Ways to Offer and Sell Securities Without Registering with the SEC?"

MoneyTree Survey. PriceWaterhouseCooper's. Reports on Venture Capital indicate where the Angels' money is being invested too.

Business Angel Investing Groups Growing in North America. Ewing Marion Kauffman Foundation and Angel Capital Education Foundation, 2002.

Article Contributors

Writer: Polly Campbell