An angel is a high net-worth individual who invests his or her own money in start-up companies in exchange for an equity share of the businesses. ACA recommends that entrepreneurs work with investors who are accredited investors (who meet requirements of the Securities and Exchange Commission) and who can add value to the company via high quality mentoring and advice. Other important things to know about angels include:
- Many angels are former entrepreneurs themselves
- They make investments in order to gain a return on their money, to participate in the entrepreneurial process, and often to give back to their communities by catalyzing economic growth.
- Angels make a return on their investment when the entrepreneur successfully grows the business and exits it, generally through a sale or merger
- It is estimated that angels invested 19 billion in more than 55,000 start-up businesses in 2008 (Source: Center for Venture Research)
- Angels tend to invest in companies that are located near them regionally (or to co-invest in a wider geography if a local investor they know and trust is involved)
The key thing to me at the end of the day is can the angel investor add value to the company. This is commonly referred to as “smart money”, or money that comes with skills, connections, knowledge, or other valuable resources.
Remember, if you take outside capital from angel investors or other sources, you need to plan in advance how you will return the capital with a good gain. As stated above, this generally occurs when the company is sold or merged with another company.