What is Angel Investing?
An angel investor (or seed investor) is a high-net-worth individual who provides capital as an investment for small startups in exchange for equity in the company. Angel investors can be friends or family members of the entrepreneur or just individuals interested to invest in the company at the early stage of its startup. Do not get an angel investor confused with a venture capitalist, who is a private equity investor that provides capital to companies with high growth potential and high risk for equity in the startup. The difference between VCs and angel investors is that angel investors use their own money while venture capitalists manage pooled money from many other investors. VCs do not normally invest in startups from the very beginning like angel investors normally would; rather, they target companies with long-term growth potential that are at the point where they are looking to commercialize and scale their idea. Another type of investment vehicle is a private equity fund that basically looks for already well-established businesses with much less risk and reward, providing major capital for a majority stake in the company. Rather than investing in publicly traded companies on stock market exchanges, angel investors, venture capitalists, and private equity firms invest in private companies. But how does an aspiring angel investor get started in acquiring equity in a company?
Requirements to Become an Angel Investor
To become an angel investor, you must have very specific knowledge about the business or product and have large amounts of money (ranging from $50k-1 million). An angel investor finances a startup using seed capital, referring to the money raised by a business in its infancy, for future equity in the company. Seed funding is the first official equity funding stage. It typically represents the first official money that a business venture or enterprise raises. This early financial support is ideally the "seed" which will help to grow the business. Seed capital from the angel investor can be used to develop a business idea to the point that it can be presented effectively to venture capital firms that have large amounts of money to invest. Obtaining seed capital is a key funding stage required for a startup to become an established business. Much of the seed capital a company raises may come from sources close to its founders including family, friends, and other acquaintances. Next, these seed funding rounds can be followed by Series A, B, and C funding rounds. Once a business has scaled up and developed a reputable track record, the company may opt for Series A funding in order to further optimize its user base and product offerings. The main difference between seed capital and Series A funding is the amount of money being invested and what form of ownership the investor receives. Seed capital will be in the tens or hundreds of thousands of dollars, while Series A financing is usually in the millions of dollars (approximately $2 million to $15 million). Series A financing comes from well-established venture capitalists, private equity firms, and wealthy angel investors. Next, Series B rounds (approx. $33 million) are all about taking businesses to the next level, past the development stage (Series A). Investors do this by expanding market reach and scaling the company. Businesses that make it to Series C funding are already quite successful. These companies look for additional funding in order to help them develop new products, expand into new markets, or even to acquire other companies. Series C funding is focused on scaling the company, growing as quickly and as successfully as possible. In Series C, groups such as hedge funds, investment banks, and private equity firms are usually the type of firms raising capital for the business. Most companies gain up to hundreds of millions of dollars in funding through Series C rounds and are prepared to continue to develop on a global scale, utilizing Series C funding to help boost their valuation in anticipation of an IPO.
Profitable Angel Investments
"Unicorn" is a term used in the venture capital industry to describe a privately held startup company with a value of over $1 billion. Startups worth over $1 billion are called unicorns because they are so rare and mythical; only 0.07% of startups ever reach a $1 billion valuation, which is why they are as difficult as finding a unicorn. However, there are some notable unicorn investments that made some investors a lot of money.
For example, Jeff Bezos invested $250,000 in the first angel round in Google and that at today's prices his shares would be worth $1.6 billion. His shares turned into IPOs and translated into a 112,000 % increase. Andreas Von Bechtolsheim also invested $100,000 in Google and made a $1.7 billion return on his original investment.
Benchmark is a venture capital firm that provides seed money to startups. Arguably the greatest VC investment ever, Benchmark’s investment of $6.7 million in eBay turned into over $5 billion, yielding a 100,000 % ROI.
Peter Thiel was the first angel investor in Facebook, investing $500,000, which turned into more than $1 billion in cash. If he didn’t cash in his shares, his would have amounted to a sum of $9 billion today.
Conclusion
As you can see, angel investing is one of the most profitable yet riskiest ways to invest your money. Typically, as a beginner, you would want some experience or knowledge of the business, as well as who the founder is. You don’t need to invest hundreds of thousands of dollars; invest what you are comfortable to lose.