Angel Investing
Frequently Asked Questions
Below are some common FAQs to assist you in learning more about the field of angel investing
What is an angel investor?
An angel investor is a high net-worth individual who invests personal funds into start-up companies. Angel investors must meet the SEC standard for being an accredited investor. Some additional characteristics of being an angel investor are listed below.
- Angel Investors are seeking to invest in start-up companies that have the potential for high-growth and scalability.
- Angel Investors seek 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 founder successfully grows the business until there is an exit opportunity, generally through a sale or merger of the business. Upon the exit, angel investors receive a return on their investment.
Is angel investing risky?
Yes- angel investing is a risky asset class. Individual angel investors are advised to invest no more that five to eight percent of their entire net worth into this asset class. On average, over fifty percent of all start-ups fail to return capital.
What are angel groups?
Individual angels are joining together with other angels to evaluate and invest in entrepreneurial ventures. The angels can pool their capital to make larger investments. Angel organizations come in many forms, but all have certain characteristics:
- They meet regularly to review business proposals
- Selected entrepreneurs make presentations to the membership of the group
- Member angels decide whether to invest in the presenting business
- Angels work together to conduct due diligence to validate the plans, statements and history of the entrepreneurial team
Other points of interest and important statistics about angel groups are:
- The size of angel group investments in entrepreneurial firms varies widely.
- Many angel groups co-invest with other angel groups, individual angels and early-stage venture capitalists to make investments of $500,000 to $2 million per round.
- Groups invest in innovative firms in a range of industries. The most common areas are software, medical devices, telecommunications, and manufacturing.
- While some groups focus on a specific industry area, the majority are open to a variety of areas and select those markets with which some of their members have expertise.
How do I find an angel group?
- Review the ACA Member Directory to find an ACA member angel group in your region.
- Angel groups can vary widely in size, number of members, amount invested, types of industries, etc.
- If you are an aspiring angel, you should explore the various angel groups and locate a group that aligns with your personal investment thesis.
How do I start an angel group?
ACA provides the AngelBox Basics toolkit to assist communities with planning and launching a new angel group.
What is the difference between angels and venture capitalists?
Angel investments are considered the first “outside money” into a start-up, and invest during the pre-seed and seed funding rounds.
What kind of companies do angels invest in?
Angels look to invest in high growth, highly scalable companies that have the potential for a 10x return. They look for companies that can either disrupt an existing marketing or create a new market.
How do I know my business is right for an angel group investment?
Angel investment is the right source of funding for only a small proportion of start-up businesses. When considering yourself for investment by an individual angel or angel group, ask yourself these key questions:
- Am I willing to give up some amount of ownership and control of my company?
- Can I demonstrate that my company is likely to realize significant revenues and earnings in the next 3-7 years?
- Can I demonstrate that my company will produce a significant return for investors?
- Am I willing take the advice from investors and accept board of director decisions I may not always agree with?
- Do I have an exit plan for the company that may mean I’m not involved in 3-7 years?
No two groups are exactly alike, but generally groups expect to at least see the following:
- A strong management team with experience and proven skills.
- Unique product or service distinguished by an identified competitive advantage and large market
- Your personal financial investment in the company and investments from your friends and/or family
- A clear picture of the market for your product or service and realistic plan for market penetration
- An exit strategy for the investor that is reachable within 5 to 7 years
- The potential for a strong return on
When should I approach an angel group?
In general, the best time to seek angel funding is when:
- Your product has a working prototype.
- You have existing customers or potential customers who will confirm they will buy from you.
- You have invested your own dollars and exhausted other alternatives, including friends and family.
- You can demonstrate that the business is likely to grow rapidly in the next 3-8 years.
- You can showcase product-market fit that will enable your product to generate revene.
What process can I expect if I apply to an angel group for funding?
Angel groups follow several stages of review in order to make funding decisions. Below is a listing of these steps. It is important to recognize that groups may conduct these steps in a different order than is presented here.
- Application Check with the angel groups Web site to determine what documents are required initially. Many groups want the executive summary of your business plan, while others have an application form.
- Pre-Screening When the angel group receives a completed application, staff or a committee of members reviews it quickly to determine if it meets the groups general requirements. The pre-screening will eliminate applications that are incomplete, don’t meet the organization’s minimum requirements, or does not comply with the investing preferences of the organization. Expect one or two weeks for the pre-screening process.
- Screening Once an application has been accepted for review, a group of staff and angels review and further define the opportunity. If the entrepreneur passes muster at this stage, the organization may select a “champion” for the opportunity and create a due diligence committee. The angel group may ask for your full business plan in this stage and some groups hold meetings with the entrepreneur during this stage. In general, about 10 to 25 percent of all entrepreneurs who apply reach this stage. Screening is usually completed within another one to three weeks.
- Investment Meeting The entrepreneur is invited to make his or her pitch at a meeting of all members of the angel organization. A question-and-answer session follows the founder’s presentation. Members discuss key issues about the company and determine initial interest in making individual or group investments after the entrepreneur leaves the meeting. Such investment meetings are usually held every month or two.
- Due Diligence A team of members interested in investing and specialists with knowledge of the industry under consideration conduct a thorough check on you and your business. The objective is to validate the business plan, including the management team, market opportunity and amount of funding required, and to negotiate a term sheet, thus placing a value on the investment. A further cut is made: 25 to 50 percent of the companies that reach this stage are actually funded, and the process can continue for two weeks to several months.
- Term Sheet If the group chooses to invest in your company, they will negotiate with you a term sheet, a document that guides lawyers in preparing investment agreements and which determines the relationship between the company and investors. Sometimes angel groups will begin term sheet negotiation during Due Diligence. For more information on standard term sheets, other investment documents, and issues to consider, click here or visit the Books page on this website.
What kinds of term sheets and legal documents do angels use?
Sophisticated angels, working with their attorneys, use a series of legal agreements to govern their relationships with the companies they invest in. A starting point is the model legal documents developed for the National Venture Capital Association by a committee of attorneys across the country. For those looking for simpler documents, see the Angel Term Sheet developed by the Alliance of Angels. Other standard documents are included in this article.
Will angel groups sign non-disclosure agreements? If they don't, how do entrepreneurs protect confidentiality?
During the initial portions of the evaluation process, the vast majority of angel organizations will not sign non-disclosure agreements (NDAs for short). Angel groups just see too many deals, often in a similar space. When submitting executive summaries and even business plans, the entrepreneur needs to explain the business so that the potential investors can understand the company’s opportunity for success, but don’t learn about any confidential issues. If you have intellectual property that has not been patented, it is best not to disclose it to the angel group when you are first submitting your company for investment. Remember that angel groups are most interested in the business behind the technology or idea they don’t invest in the inventions but in the business models and management teams that will grow the companies. If your company makes it through to final due diligence, the angel group may need to research intellectual property issues and then would sign non-disclosure agreements at that time.