Angel investors are individuals with capital, often successful entrepreneurs, who invest in early-stage companies and are typically the first external.
Angel investors are individuals with capital, often successful entrepreneurs, who invest in early-stage companies and are typically the first external funding source after friends and family rounds. They invest between 5-10% of their portfolio into risky startup investments and are generally easier to secure funding from compared to institutional investors.
Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about the pros and cons of angel investors. Let’s face it. Angel investors are going to be one of the critical figures that you’re going to go after when it comes down to really needing capital to getting that cash infusion so that you can continue to build and scale your business. Now, there are pros, and there are cons on getting money from angel investors. In this video today, we’re going to be covering what are all those pros, and what are all those cons? So, with that being said, let’s get into it. Angel investors, in a sense, what they are is individuals that are in a position of maybe like a senior leadership role, or maybe they’re a successful entrepreneur that already did an exit in the past, and they have the money to invest in early-stage companies. Those are the people that ultimately invest
anywhere between 5-10% of their portfolio into risky investments, which are startups. Essentially, the term angel investor came back in the day from those investors that were financing Broadway shows. They were not a good investment back then, and that’s why they were called angels because that was money that they were giving, and typically, the returns were not that great. In this case, it’s not an angel investor, that individual that you see on LinkedIn with the “Angel Investor” title. Those are going to be the ones that are going to make you work a lot for just $5,000 in terms of an investment. The angel investors, at the end of the day, are those that are CEOs, that are senior executives with a great salary, and they’re going to be investing in you because they like your segment, because they understand it, because they are inspired by your story, or because they are inspired by you.
That’s why those angel investors make those investments. They either do the investments directly, or they make the investments via angel groups, which are associations or entities where all those angels come together, and they invest essentially either all as a group, via perhaps as a special-purpose vehicle, which is like an LLC, or perhaps via funds. Now, you see many of those angel groups investing via a fund. In terms of the cons of the angel investors, they’re always going to be that first stop for startups. That’s going to be the first money that comes in after the friends and family round, the people that love you, and that money that you’re going to be using over the course of your seed financing cycle in order to get to the Series A, which is the next round, where you have for the first time venture capital firms and other institutional investors investing in your business. Now,
the beauty here of angel investors is that they are a very nice segue in order to get to those institutionals, and they can also be very helpful specifically if they know your space, and if they can make perhaps introductions around potential other investors, around distribution and business development deals, and things of this nature where essentially it really helps you to move things forward and to achieve your milestones faster and better versus if you were to do it on your own. Next is that it’s really easy to raise money from angel investors if you were to compare to perhaps institutional investors. The good thing here about angel investors is that they’re investing their own money. We’re talking about smaller checks. We’re talking about checks that range anywhere between, let’s say, $5,000, the smaller checks, all the way to up even $50,000 if it’s angel investors. Now, if it’s
“super” angel investors, people that have more money like successfully exited entrepreneurs that have sold their business, those have up to even $4 million that they can put into companies, and they typically do that via family offices. But, typically, the check ranges between $50,000 to $100,000 for these investors if we look at the median average. But everything starts, really, at $5,000. Those are the smaller check sizes. In essence, the good news here about the angels is that it’s going to help you to get to where you want to go and get those introductions to the people that you need. And since they’re investing their own money, there’s not going to be heavy due diligence, going through different rounds of meeting with advisors of that VC, or things like that, because you’re essentially dealing with individuals. That’s the good thing about angel investors in which it is an easier and
faster investment and less due diligence versus if you were going to go, let’s say at a later round to an institutional where there are different ways and different processes that they need to have in place in order for them to make an investment in your business. The next thing is that angels are really easy to work with. At the very early stage when you’re at a seed-stage financing cycle, basically, what you’re going to see is that you’re going to be iterating the product, the service, and trying to get it to product/market fit, which is when it fits with the market, it covers that gap that is there, and then the product starts flying off the shelves. That’s really where you want to get it, but at this point, you’re testing a lot. The problem is if you were to get an institutional investor like a venture capital firm, and you need to do a pivot, basically, it’s going to be a turn-off
for them. They’re potentially not going to make another investment in your next round of financing, and that sends a negative signal to the market because other people are going to be like, “Hold on. This investor has the money; they’re not investing in this business, so there could be something wrong with the business, and we’re absolutely not investing.” The good thing about an angel investor is that they’re the complete opposite. If something is not working, they’re going to roll up their sleeves, they’re going to help you in searching and finding that product/market fit and getting it to the next level or the next financing cycle, which is going to be the Series A in this type of lifecycle of a business, and when those capital firms would come in. At that point, you have the business model figured out. So, that’s the good part about the angel investors is that they’re easy to work
with. They’re going to be more understanding, and they’re going to have more patience when it comes to understanding how to get to your customers and give them what they need. In terms of the disadvantages of the angel investors is that we’re talking about small check sizes. Again, going back to what I was saying earlier, it’s going to be on the smaller scale, so versus a venture capital firm that is going to give you anywhere between $2 million and let’s say $10 million if you were to do a Series A. On a seed round where you’re going for angel investors, what we’re looking at is anywhere between $5,000 to maybe like $100,000 on average. Obviously, you have the exception where it goes over $100,000, but you’re going to see anything of $100,000 and under. So, with that being said, you’re going to need a lot of angel investors if you want to raise a big amount. For that reason, your cap
table may become a little bit of a mess, so you want to be very careful with that, and if it comes to that point, one thing that you could use is a special-purpose vehicle where you group all the investors into one single entity and add one managing member that would represent all those investors. And if you need to do another round of financing or an acquisition, rather than chasing all those dozens of investors, you only go after the managing member. Again, those SPVs, you can group them up to 99 individuals. So, it’s a fantastic way to keep your own cap table and the way that you’re recording who is investing in what and how you’re chasing for signatures to make it clean and organized. The next thing that you want to keep in mind here in terms of the cons is that it’s very hard to find them. As I was mentioning, the angel investor, the best ones, they’re not going to be on LinkedIn
with that title of “Angel Investors.” Those are going to be individuals that essentially you’re going to have to be introduced by someone else, that maybe someone is going to tell you about that maybe you may be able to find something online via websites like PitchBook or CrunchBase, but it’s very difficult to find them if you were to compare that with, for example, the venture capital firms where they really like to be on the press, where they want to announce the companies that they’re investing in. Another tool that you could use for finding angels is AngelList. AngelList is a great universe that they’ve created there where they group all these investors into one single place. Now, the tough thing about AngelList is that it’s very difficult to be able to connect with people that you don’t know, so it’s more about signaling and people that you have in common versus being able to reach
out cold…