What is Angel Investing?

Very simply, angel investing is the provision of seed capital by an individual to a business (usually a startup) in exchange for equity or convertible debt.

The term ‘angel’, in this context, originated from Broadway theatre, where wealthy individuals would provide the funding necessary for a production to go ahead.

Angel investors (also known as business angels, informal investors, angel funders, private investors, or seed investors) are therefore wealthy, private individuals who invest some of their capital in early stage companies.

Unlike venture capitalists who manage and invest a pool of capital from other people, angels invest their own private capital. They usually invest in between the initial ‘family & friends’ round and the more formal rounds provided by venture capitalists and other investment companies.

An angel investor will invest for a variety of reasons: because they ‘get in’ at a very early stage, they can get huge returns if the business is successful; in addition, the early entry means that they can often develop a good relationship with the entrepreneur and provide business advice and contacts on top of the seed capital. Many angel investors have achieved their wealth through successful careers whether as entrepreneurs themselves or as part of a larger corporation; and as a result, they are often well-placed to offer expertise.

That said, the qualification for being an angel is purely based on wealth. The definition varies from country to country, but for joining an angel network the only requirement is that you tick a box to self-certify as sufficiently wealthy to consider investing your ‘spare’ cash in a startup investment.

Since the startup revolution began, the number of people who identify themselves as angel investors has increased rapidly as people see it as a potentially lucrative and exciting investment option. The well-publicised successes of startup companies like Uber, HelloFresh and Transferwise has resulted in the coining of terms like ‘unicorn’ to denote a company which reaches a valuation of $1 billion. Companies like these that fall under this mythological epithet are the Holy Grail for angel investors – though any company falling even 90% short of this standard is likely to produce returns. And it is for these reasons that the popularity of angel investing is growing rapidly.

It is also worth mentioning that a startup’s road to success is often not affected by uncertainty or recession in the larger markets; in fact, many of the startup world’s biggest success stories emerged from periods of wider economic downturn e.g. Facebook, Twitter, Skype. As such, angel investing can provide a viable and popular investment avenue in any economic climate. Startups which show particular resilience to external economic pressures have been dubbed “cockroaches” (the cockroach famed for its ability to thrive in a nuclear winter).