An angel investor is a wealthy individual who invests their own money (usually between $5,000-$250,000) in early stage companies.
So why would anyone want to risk that sort of money on an unproven business idea?
In addition to the hope and dream of a return, angels have many different motivations for making investments. Some invest because they know the founder or are interested in supporting a great idea. Some, particularly those dubbed super-angels, have worked in the tech industry for a long time and invest in new ventures in order to give back to the community. And others are driven by ego or the desire to be associated with the new new thing.
In other words, angel investors are not motivated by any one goal.
Unlike institutional venture capitalists, angels can set their own targets or expected return on investment. Some angels will want a 10x return like venture capitalists; but others will be perfectly satisfied with a 2x return or simply the pleasure of supporting a business or entrepreneur they love.
All angel investors are supposed to be accredited investors; which means that they qualify to make investments according to rules set forth by the U.S. Securities and Exchange Commission (SEC). Currently, in order to qualify as an angel investor you must have at least $1 million in assets (not including the value of your home) or income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
That said, there are plenty of people who invest in early stage companies who are not accredited. Although you can raise money from non-accredited investors, it does come with some risks and is generally not advised.
Unlike venture capital, which is institutionalized and highly-organized, you can’t just search “angel investors” and find ones in your area. Therefore, it is often easiest to find angels via your friends, friends of friends, or professional network.
Don’t have friends with money? Fret not! More and more angel investors are banding together to form angel networks which have standardized processes for finding and selecting potential investments. Robin Hood Ventures in Philadelphia, New York Angels, and Golden Seeds are all examples of angel networks which have been created to make it easy for angels to find entrepreneurs and vice versa!
A new startup called Angel List is an online social network where early stage companies can meet investors. And, JumpThru, a New York City-based accelerator, released a database of women investors, which has a section dedicated to female angels.
Cocktail Party Fact
Change is a comin’! The JOBS Act that goes into effect on January 1, 2013 includes a provision that legalizes crowdfunding for start-ups. Under the new Act, any individual making under $100,000 will be allowed to invest up to 5% of their yearly income (up to $2,000) and any individual whose income is $100,000 or more will be able to invest 10% of their annual income (up to $10,000) in companies. So if you’ve got a great idea, cozy up to your friend who just got that promotion…she may just be able to invest in YOU by next year!