FAQs for Angels

Frequently Asked Questions

An angel investor is a high net worth individual who invests directly into promising entrepreneurial businesses in return for stock in the companies.  ARI recommends that all angels meet the wealth or income requirements for "accredited investors set by the US Securities and Exchange Commission
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. ARI has 355 American groups in its database in November, 2012.

ARI has heard many answers to this question, ranging from "it’s fun" to "I get to help create great new companies in my community" to "it can lead to financial returns," among others and in many combinations.

A 2007 study based on 1,137 exits of angels in angel groups found that the average return of angel investments in this study is 2.6 times the investment in 3.5 years— approximately 27 percent Internal Rate of Return (IRR).  However, the distribution of returns varied considerably – 52% of the investments returned less capital than the angel had invested and 7% of the exits achieved returns of more than ten times the money invested, accounting for 75% of the total investment dollar returns.

The amount depends on many things, but most investments by individuals are between $5,000 and $100,000 per company round.  Many times, several individuals invest in the same company at the same time, making the total investment in the business be between $20,000 and $1,000,000 or more.

It depends on the person, but thinking through your risk tolerance up front is important.  Because more than half of angel investments lose money, you should be willing to lose the money you set aside for angel investment.  For many experienced angels, this amounts to 5 to 10 percent of their overall investment portfolio.  The most sophisticated angels make at least ten investments over several years for a better chance to make a return on their investment, counting on one or two to provide nearly all of their return.

The Center for Venture Research estimates that U.S. angel investors invested $22.5 billion in about 66,000 small businesses in 2011.  Many of the investments were in start-up or very early-stage companies.

Angels look for innovative startups that can grow quickly in sales and value, creating jobs along the way.  The entrepreneurs leading these companies are planning to "exit" the company in a short time period, through sale of the company to an Initial Public Offering (IPO).  Famous examples of angel-backed businesses include Google, Facebook, and Starbucks.  Many angels like to invest in companies located in their communities and in industry sectors in which they have experience or understanding.

Learn as much about early stage investing as you can. Get to know experienced angel investors.  Participate in educational seminars on a regular basis, too. Spend time working with a due diligence team; you’ll learn the unique risks of each investment and improve your investment spotting skills. Lastly, diversify. Invest in multiple deals that you feel are of a high quality and spread your risk; it makes intuitive sense.  Finally, invest in companies in which you understand the product, market, and industry.

The full process for sophisticated angel investors and angel groups often includes:  screening of an executive summary of a business plan, meeting with the entrepreneur and submission of a business plan, presentation by the entrepreneur of the plan with a Q&A period, due diligence on the company and its management team, negotiation of a term sheet and legal documents, and post-investment support, including service on the company’s board of directors, monitoring reports, and providing mentoring and advice.  In the case of most angel groups, a small percentage of companies make it through the full investment process.

In the case of an angel group, the pre-screening process often ensures a “match” on basic requirements: the company is located within its preferred geography, growth stage, industry sector expertise, and dollar investment amount.  Additional traits for the companies include a strong management team, product that solves pressing needs and has customers that will purchase it, high growth potential, competitive advantages, and exceptional return on investment.

Angel groups often offer a variety of benefits:  high quality investment opportunities, diversification of investments, share due diligence with subject matter and industry experts, networking with talented people, education and training, and a chance to promote growth in your community, among others.

As angel groups are located in nearly every state, there is a good chance you can find one near you.  You can find angel groups in ARI’s Find a Group map to link to their Web site.

Angels generally invest their own money in start-ups and very early stage companies, while VCs mostly provide capital they have raised from others to later-stage businesses for growth.

Angel groups (and individual angels) are likely the next stage of financing and it is important to ensure that entrepreneurs have access to robust angel capital after crowdfunding.  These types of accredited investors are also important to entrepreneurs for their mentoring and advice, and for better structuring investments for long-term growth.

ARI highly recommends that potential investors read as much as they can about investment (including resources on this site), talk with existing angels and angel-backed entrepreneurs, attend education events, and attend a local angel group meeting to see how the process works.  It is also important to talk with accountants and attorneys with experience in equity finance before and during your angel investment experience.