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What is an angel investor?

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Jan 4, 2023

Fact Checked By:
David Nicholson - Finance Editor

What is an angel investor & how do they work?

A number of people contact us to ask “what is an angel investor?” Angel investors offer more than funding for your start-up.

Angel investors often offer more than just financial support. They can also provide additional assistance, such as a professional network and business expertise that could prove crucial in getting your business off the ground. They are also known as business angels.

Small and medium-sized companies can find financing solutions for their needs, whether they are looking to grow, pay off debts, increase cash flow, buy new equipment, or take advantage of special opportunities.

A loan from a bank, building society or other financial institution is often the best starting point. There are many other options available, especially for new businesses. Angel investors or business angels are one option.

We will discuss what angel investors look like, how angel investors operate, and what you need to know before receiving funding.

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What an angel investor means

Angel investors are usually wealthy individuals who seek to make decent investments by supporting small, private enterprises.

An angel investor has two options: they can invest as an individual or in a group called an “angels syndicate” or through an equity crowdfunding platform where their money is used alongside that of other investors.

An angel investor is often referred to as “a seed investor” because they favour start-up businesses requiring capital injections to get off to a good start.

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How angel investing works

An angel investor provides support in two ways. One, angel investors offer their own money in exchange for a share in the company.

You could offer them private equity in your business, or convert debt to make stock from an angel investor.

However, it’s not all about money. Angel investors are often people who have experience in building, leading, or supporting businesses.

They can bring value to the business through their knowledge, experience, and potential connections as well as the angel funding.

However, this is not always possible. Some angel investors might choose to remain silent, allowing you to manage your business on your own and to make any sales as you wish.

Angel investments are different from finding a business partner. Angel investors are likely to be more invested in your long-term success.

Angel investors vs venture capitalists

Venture capitalists and angel investors both invest in businesses to receive equity. However, there are important differences.

What are some questions an angel investor might ask?

Angel investors invest in businesses at the early stages of their development. There is always a chance that they will not get their money back from the angel investment. They will need to get a clear understanding of your business model, aspirations, and how you plan to build it.

Angel investing will also need to examine your financial situation. This will include looking at your cash flow and projections for the next business years. Also, they will want to know how you plan on using the funds.

Angel investing is different from traditional financing options like business loans. However, both will require the same level of preparation when approaching funding.

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How do I find angel investors?

There are many ways to begin your search once you know what you want from angel investment, and what issues angel investments can help with.

Many online platforms can help you locate an angel investor or networks of angel investors, such as LinkedIn, Angel Investment Network, and other equity crowdfunding platforms. The UK Business Angels Association is a trade organization for angel investment, early investing and guides. It also has a membership directory.

Angel investors: advantages and disadvantages

There are many advantages and disadvantages to any type of funding for a business.

These are the benefits of most angel investors:

  • The risk angel investors are willing to take in pursuit of returns is great compared to banks.
  • Angel investors tend to have knowledge and experience in business
  • Angel investors provide access to networks
  • Many angel investors won’t take a share in your business, even though you don’t have a loan.

However, there are also pitfalls to all of these points. These are:

  • Investors may want to have a say in how the funding is used and take a stake. This could reduce your control over the operation. You may end up paying a lot more for their stake than you would have for a loan.
  • Investors may feel pressured to deliver the returns they want.

What are other options for funding?

Angel investors can be used alongside other funding sources and not as a substitute.

Other sources of funding include bank and building society loans (both long and short-term), government grants, rolling credit options, asset funding, and venture capital funding.

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