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Angel Investment Overview

This chapter covers:

  1. What is angel investment?
  2. History of angel investment
  3. How much angel investors invest and in how many businesses

What is Angel Investment?

Angel investment refers to seed money from wealthy individuals who provide capital to an entrepreneur to help develop a business idea so that it can be launched. An angel investor is a person who provides backing to very early-stage businesses or business concepts.

Angel investors are typically, but not always, entrepreneurs who have become wealthy, often in technology-related industries. Angel capital usually follows start-up financing after “friends and family” sources. Once brought to market, start-up companies with angel backing, usually seek additional funding from other sources, sometimes venture capital, to execute the business plan that forecasts exceptional growth potential. Given the lower cost of starting internet companies, some angels see the need to raise additional venture capital waning but of course, this need varies from company to company.

It’s important to keep in mind that one-size-does-not-fit-all when it comes to angel investment. All angel investors have their own priorities, funding criteria, sectors/areas of interest, amounts they will invest and number of investments they will make. This means that entrepreneurs need to do their homework before making contact with a potential backer. The ChubbyBrain Funding Discovery Engine aims to help entrepreneurs identify angel investors and venture capitalists that match with their business based on the investment history of angels and VCs.

Finding an angel investor – wealthy individuals who look to help budding entrepreneurs – can often be vital to executing a business plan. Angels are individuals who invest their money, unlike venture capitalists, who first invest their firm’s capital, and then sometimes seek others to also put money into the venture.

Typically, an angel’s money is exchanged for convertible debt or an equity stake. Convertible debt is a type of bond that the holder can convert into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price. Equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid.