Understanding Angel Investors

Angel investors get their name because they often invest in businesses that everyone else deems too early, too small or too risky. Sometimes, that means they are the only thing standing between a fledgling company and oblivion. Most of the time, an angel’s investment goes up in flames. So what motivates them?

To answer that, let’s talk about what a typical angel investor looks like.

They are usually relatively wealthy. Often, they got that way by founding and exiting a previous business, but not always. Their financial position means they can write reasonably large cheques in full knowledge that they will most likely never see that money again.

Angels often have good networks and tend to hang in groups. Sometimes this is formal, through angel groups or networks that club together for pitch days and share due diligence. Mostly, though, it is informal. Angels show each other deals, take turns leading the investment, and share thoughts and ideas.

The angel world is all about quid pro quo.

The typical cheque size for an individual angel depends on their wealth, their risk appetite, how keen they are on the specific deal, and how long they have been in the angel game for. A general guide is $25K to $250K per investment. A typical seed or angel round of $1-2m is filled by between 5 and 15 angels. Securing one well-regarded angel can lead to participation from others in their network.

An angel may do anywhere from 0 to 20 deals per year. A lot of angels maintain day jobs or other projects. This makes them more unpredictable than professional investment firms. They might seem highly engaged at first, and then…not. Sometimes they may have actively decided not to pursue the investment. Other times, they may just be distracted on something else.

Because angels are investing at an early stage, formal due diligence is tricky. Established companies raising capital from venture capital investors have contracts and revenue to pore over. Many early stage businesses have an unproven idea and patchwork code.

What goes into their investment decision, then?

The two key criteria are the strength of the founding team and the scale of problem they are solving. Usually in that order. A substantial component of an angel’s investment decision is instinct. Many of the angels I know will commit to an investment after a single meeting with the founders.

So, why do angel investors do what they do? There are three primary reasons. Most angels are motivated by a mix of the three, though the proportions differ.

The first reason is money. Most of their bets might not pay off, but some of them do. These few winners can more than make up for the losses. And every now and then, they strike diamonds. Angel or seed round investors in companies like Facebook and Google have made well over 1,000x their money in some cases. Investments of $50K have turned into hundreds of millions of dollars.

The second reason relates to knowledge-building. Angel investing allows people to stay connected to the leading edge of technology and progress. It can give them valuable insights that translate to their other jobs or pursuits, or simply allow them to stay ‘current’.

The third reason is simple. Angel investing is fun. It stirs up passions. It ignites both hemispheres of the brain. It leads to networks and long-lasting friendships.

Angel investors are selfish. They are in it for themselves, just like everyone else.

But they aren’t just doing it for the money.