Angel Investing: Definition, Benefits & Risks

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  • 0:03 What Is an Angel Investor?
  • 0:20 Angel Investing vs.…
  • 1:08 Benefits of Angel Investing
  • 1:47 Risks of Angel Investing
  • 2:36 Pursuing Angel Investors
  • 3:50 Lesson Summary
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Lesson Transcript
Instructor: Tara Schofield

Tara has a PhD in Marketing & Management

Angel investors are a popular resource for funding a new business idea or start-up company. There are some fundamental considerations when pursuing angel investors. This lesson reviews many of those factors.

What Is an Angel Investor?

Angel investors are individuals who invest financial resources in start-up business ventures. These people offer money in exchange for stock, equity, or repayment. Angel investors are growing in popularity since other capital and start-up funds can be difficult to access.

Angel Investing vs. Venture Capital

Angel investors typically are individuals who have earned money through their own efforts and have real-life experience. They often invest in one or just a few businesses at a time, which allows them to be more involved and find a personal connection to the new idea. Angel investors tend to expect an immediate and high rate of return, and they'll be involved only long enough to help an idea get off the ground.

Another common type of private investor is a venture capitalist. These are typically professional investors who consider investments their business. The often invest larger amounts of money and are interested in existing businesses, as well as new ideas. Venture capitalists might have a more rigorous process for approval for funding, and they're likely to have limited involvement and day-to-day interaction with business owners once they feel the company is on track.

Benefits of Angel Investing

There are several potential benefits of angel investing. First, angel investors have flexibility to invest in innovative start-up ideas. This allows start-up entrepreneurs who need smaller amounts of cash to find a funding option when other financing is not available.

Angels are more accessible. There are more individuals with some cash they want to invest than other funding possibilities. Many of these angels are self-made and have experience to share with a new business owner.

And finally, angel investments can happen quickly. Because there is usually not a lot of red tape or several layers of approval needed, an angel investor can make a decision and fund an idea in a short amount of time.

Risks of Angel Investing

Angel investing also has its risks. For example, angel investors might be more personally involved in the business. While traditional funding sources, like banks and institutions, are more likely to step away from a business once the money has been transferred, an angel investor is personally invested. He or she is putting in their own money and might want to watch the business operations to ensure that the money is safe.

Angel investors also might have more input in business decisions. Your angel investor might give you money and then feel entitled to make changes in how your company is operated. This might not work if you are not open to their suggestions.

Additionally, most angel investors will make one investment and expect a sizable return. It's likely they will not offer additional funds if the business needs more money, and that they will want to see a return on their investment in a short amount of time.

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