What are angel investors?

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Angel investors are people who invest their own money in startup companies or ventures, typically in exchange for an equity stake in the business or sometimes royalties.

Angel investing is considered riskier than many other types of investing because many startups fail within their first few years of operation. Angels are often high-net-worth individuals who have more money to invest than the typical individual investor. Many angel investors are former entrepreneurs themselves, helping give them the expertise to successfully back a new venture.

Angel investors often invest in what are called “seed-stage companies,” which are companies at the earliest stages. These young startups often haven’t turned a profit yet or shown they’ll be successful long term. These types of companies are high-risk, high-reward. Investors run the risk of losing all of the money they put in. But if the startup proves to be a “unicorn” — a term used in the venture capital world to describe a private company with a valuation of $1 billion or more — then the angel investor reaps the rewards of getting in on the ground floor of the next big product, service or technology.

An angel investor tends to differ from a venture capital firm in that the latter usually invests larger sums of money in an opportunity and often requires a much bigger payout than an angel investor might.

How angel investing works

Angel investing is a form of investment used for early-stage businesses that allows them to get off the ground. Investors often act as mentors, guiding the entrepreneur on how to run the business, as well as providing funding and resources. In exchange, angel investors look to earn a significant return from their investment.

Many investors use a syndicate model that funds different startups at the same time. A syndicate of angel investors is an organized group that acts as a single force, with one or more individuals coordinating the group. One individual, known as the syndicate lead, is typically designated to perform certain duties, such as finding and vetting new companies to invest in, managing the portfolio and guiding investment decisions.

Once an investment is made, the angel group’s members evaluate each startup and make decisions about whether to continue investing. Angels can also fund a startup directly.

How to reduce the risks of angel investing

If you invest in a startup that fails, you could lose all the money you put in. That’s a scary proposition, but there are some ways to mitigate the risks.

• Understand what you’re investing in. Do your research and understand the business model.
• Find another angel to work with. If you have enough capital to invest, consider teaming up with another angel investor. You’ll be able to leverage each other’s knowledge and spread out your investment portfolio.
• Invest with a syndicate. If you don’t have enough capital to invest, consider teaming up with an angel group that has already vetted the business, which can help reduce your risk.
• Look for businesses you understand. Angel investors tend to invest in what they know, so if you’re in a business that you understand, you have a better chance at success and mitigating risk.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.