Angels are often described as supernatural beings with wings, protecting and coming to people’s rescue when they are in danger, just at the nick of time.
Although angel investors don’t have wings, they often invest in startups at the early stages of their businesses, providing them with capital to grow their businesses.
The term “angel,” in relation to funding, originated from the Broadway theatre in New York, when wealthy individuals gave money to propel theatrical productions. The term “angel investor” was coined by William Wetzel in 1978 after he completed a study on how entrepreneurs raised capital for their businesses. William Wetzel was the founder of the Centre for Venture Research and a professor at the University of New Hampshire. He used the term “angel investor” to describe investors who supported startup businesses with seed capital.
Who is an Angel Investor?
An angel investor (also known as a private investor, business angel, angel funder, or seed investor) is an individual who invests in startups, typically in exchange for an ownership interest in the startups.
Angel investors often take a high risk in startups, as they usually invest at the earliest stages of startups (where the risks of failing are relatively high) and when most investors are not prepared to invest in them at this stage.
Unlike venture capitalists and other institutional investors, who often invest in businesses that are already revenue-generating, angel investors often invest in founders taking their first steps in business. Most times, they play an active advisory role in the management of the new business and sometimes take a board seat.
Angel investments are usually done by individuals or collaboratively through angel syndicates/networks.
Angel investors are usually wealthy individuals, and they may either be the startup founders’ family and friends or an unrelated party who frequently makes angel investments.
Angel syndicates or networks are groups of investors who pool funds together to invest in startups.
Upon creating an angel syndicate, the investors may appoint syndicate leads who will be responsible for identifying startups for possible investment and, in some cases, managing the entire investment process, from ensuring that the necessary due diligence is conducted to ensuring that the investment terms are well negotiated and the investment documents are duly executed.
In some cases, the syndicate leads will also be charged with the responsibility of following up on the investments and taking on a directorship role in the startups to ensure that the startups are being managed properly.
In large angel syndicates or angel networks, the investors may have an investment committee that will be responsible for performing these functions on behalf of the syndicate members.
Examples of angel syndicates and networks include the Lagos Angel Network, Diaspora Angel Network, African Business Angel Network, Ghana Angel Network, Silicon Cape, SSE Angel Network, among many others.
How Do Angel Investors Make their investments?
Angel investors often invest in startups to receive an equity stake in them. A typical angel investment is often between $25,000 to $100,000, but it may be more. Where angel investors do not make an equity investment in a startup, they usually invest via a convertible note or a SAFE.
The investment process usually entails the following:
- Angel investors and startup founders connect through referrals, industry communities, business seminars, or the startup founders sending a pitch deck to the investors.
- Where the angel investor is interested in making an investment in the startup, the angel investor conducts due diligence on the startup and engages in discussions with the founders.
- When the angel investor decides to invest in the startup, a preliminary negotiation document, such as a termsheet, is drawn up with clauses on the investment terms, investor rights, and an exit strategy for the angel investor.
- As soon as all negotiations on the termsheet are concluded and depending on the kind of investment, substantive legal agreements will be created and signed by the startup and the angel investor. The angel investor will thereafter proceed to fund the startup with the agreed investment amount and this closes the deal.
To wrap this up, the reason startups constantly raise funds is primarily because working capital is very essential to a startup’s growth and development, and when starting out, angel investors are reliable sources of initial financing options that a startup can explore.
