Get All Access for $5/mo

Why Angel Investors May Be Your Startup's Key to Long-Term Viability For many startups, angel investors play an essential role — not only in early-stage enterprise development but in long-term company growth and success.

By Alexander Dillon Edited by Kara McIntyre

Opinions expressed by Entrepreneur contributors are their own.

If you've got a startup, chances are you've heard of angel investors. After all, the funding for your big idea has to come from somewhere — and if your company is at the point where it's looking for capital, an angel investor may just be your answer.

But before signing any contracts, you'll want to explore the differences between angel investors and other types of funding (venture capitalists, for instance), as well as the pros and cons of partnering with an angel investor.

Related: 5 Things Angel Investors Want to Know Before Investing in Your Startup

What are angel investors?

The term "angel investor" is used to describe a private individual who provides capital to a startup company, usually in exchange for equity. These individuals rely on their own wealth to make investments, but this doesn't necessarily mean they are exorbitantly wealthy. The actual amount of their investment can vary, depending on the company's size, but they will be using their own money rather than an aggregation of funds from others.

Though not a requirement, most angel investors are accredited investors, which ensures they have the appropriate funds for investing. In recent years, some have used the term "angel investors" for high contributors in the crowdfunding sphere — i.e. someone who has donated thousands of dollars to product campaigns in exchange for part ownership.

Some people connect with angel investors via "angel groups" or established syndicates that connect startups with funding. There are even a number of websites devoted explicitly to connecting angel investors with potential businesses. But angel investors can also be friends, family or social connections generated on platforms such as LinkedIn.

Related: Where to Meet Angel Investors and How to Pitch Them When You Do

How they play a pivotal role

Unlike other forms of early funding, angel investors often play a unique and pivotal role in startups. Because they're investing their personal wealth into a young business, you can expect angel investors to have a higher level of interest and involvement in the company. Whereas venture capitalist firms or banks may take a neutral stance towards your company, angel investors invest based on their passions and often due to a desire to see the company and its people flourish.

The potential drawbacks and benefits of angel investor funding

It's risky to be an angel investor. They're usually the first to fund a company, so they generally want equity in exchange for their investment. And as mentioned, they're likely to be highly involved in the company's development — so you'll want to ensure that you see eye-to-eye with your angel investor(s) and agree on the company's future. This will require quite a bit of preparation (and paperwork) on your end, which can also eat up a lot of time.

From the investor's perspective, there are definite disadvantages to being an early investor in a startup. It can take years to see any sort of growth in the company, and future revenue is never guaranteed. This type of investment is by no means a "fast cash" option, but a long-term partnership.

Despite these drawbacks, early-stage angel investments still have plenty of benefits. The same passion and interest that may be a burden can also be beneficial advice for the development of your company. Angel investors often look for companies in a sphere they're knowledgeable in, so it would be unwise to shrug off their experience. Their early involvement can also help get your company off the ground and put you in a position for more funding from VCs, especially if they already have connections in the industry.

For investors, there is the chance of long-term profit and future business opportunities, which aren't available in later-stage investments. You'll also be diversifying your portfolio with unique investments and the chance to make multiple investments over time. Plus, you'll have the opportunity to share your business knowledge and guide the development of the company, rather than simply writing a check.

While angel investors aren't the best funding fit for every startup out there, they can provide a unique resource of value and partnership hard to find through other capital investment options.

Related: 5 Reasons Why Angel Investing is Best For Small Businesses

The takeaway

If you're looking to secure early-stage funding for your startup, angel investors are likely your go-to option. In recent years, they've become a crucial part of the startup lifecycle. However, this increase in angel investors has also meant increased competition. You'll need to prepare the correct information to find and secure an angel investor.

A concise, clear presentation of your company and a defined exit strategy for the investor are important in securing early-stage investment. You'll also want to know how much equity you're willing to lose in exchange for early investment in your company and be prepared for a long-term business relationship with your angel investor.

Alexander Dillon

Entrepreneur Leadership Network® Contributor

President of GenCap Management

As co-founder and president at GenCap Management, Alexander Dillon focuses on growing and supporting promising businesses through capital investment and leadership. Alexander seeks out entrepreneurs and leaders looking to grow their businesses and realize their full potential.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Science & Technology

5 Automation Strategies Every Small Business Should Follow

It's time we make IT automation work for us: streamline processes, boost efficiency and drive growth with the right tools and strategy.

Business News

Former Steve Jobs Intern Says This Is How He Would Have Approached AI

The former intern is now the CEO of AI and data company DataStax.

Business Process

How CEOs Can Take Control of Their Emails and Achieve Inbox Zero

Although there are many methodologies that leaders can use to manage their emails effectively, a consistent and thought-through process is the most effective way to systemize and respond to emails and is a step of stewardship for the effective leader.

Side Hustle

'Hustling Every Day': These Friends Started a Side Hustle With $2,500 Each — It 'Snowballed' to Over $500,000 and Became a Multimillion-Dollar Brand

Paris Emily Nicholson and Saskia Teje Jenkins had a 2020 brainstorm session that led to a lucrative business.

Marketing

5 Critical Mistakes to Avoid When Giving a Presentation

Are you tired of enduring dull presentations? Over the years, I have compiled a list of common presentation mistakes and how to avoid them. Here are my top five tips.

Leadership

Visionaries or Vague Promises? Why Companies Fail Without Leaders Who See Beyond the Bottom Line

Visionary leaders turn bold ideas into lasting impact by building resilience, clarity and future-ready teams.