What is angel investing & how does it work?

By Allstate

Last updated: January 1

Many entrepreneurs have great business ideas and incredible drive to bring those ideas to life, but they might be lacking one crucial thing: funding.

There are a variety of options for raising funds for a new business—from crowdfunding to venture capital—but a unique option is working with an angel investor.

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What is an angel investor?

Angel investors are individuals who offer funding for a stake in a company at its early stages, according to Forbes. They typically have a background in business but may not necessarily be "accredited." Angel investors may be doctors, lawyers or business partners, adds HQ.org.

Angel investor vs venture capitalist

Venture capital (VC) investors use the money of others to invest in startups and ventures, according to Forbes.

Though both angel investors and VCs invest in startups, they typically put in money at different stages in the process.

Advantages of an angel investor

There are pros and cons to angel investing. Here are a few of the benefits of teaming up with an angel investor, depending on your business needs.

Less risk

Starting a new business is inherently risky but partnering with an angel investor helps mitigate some of that risk. For one thing, angels generally come with some entrepreneurial experience, and, given that their own money is on the line, they’re likely to be more personally invested and driven to help you succeed, according to The Entrepreneur.

No traditional loans to pay back

Business loans typically come with interest rates and due dates. But an angel investor usually makes an investment in exchange for a stake in the company, according to The Hartford Not only does this mean there is no loan to be paid back, but it also ties the success of the company to the success of the angel’s investment.

Although a business loan might be a more common way to obtain funding, it typically comes with interest rates and due dates that don’t change based on the success or failure of your business. But when a business receives an angel investment, things work differently.

Disadvantages of an angel investor

With less risk and no loan to pay back, why wouldn’t every business seek out an angel investor? What is there to lose? Well, the cons of angel investors largely boils down to one thing: control.

Loss of control

Remember, angel investors typically offer funding for a stake in the company. How much stake in the company they ask for depends on the investor. Typically, it’s around 10%-15% in equity, according to The Hartford.

Consider an angel investor a like-minded business partner. Someone who sees and recognizes the potential in your vision. They’re likely in it for the long haul.

How to find angel investors

Other than family and friends, you might be wondering how to find an angel investor who can offer financial support with your best interests at heart. Here are a few ways to start your search.

Find investors geographically close to you

Start by finding angel investors who live nearby, advises Forbes. Angel investors typically like to work closely with entrepreneurs, and a business relationship with someone who is local is easier to sustain

Look into typical sources for angel investors

Some opportunities might come from an in-person meeting or by sending a message on LinkedIn, according to The Hartford. You can also explore online resources like Angel Capital Association (ACA) or explore this list of angel investor groups.

Also, consider attending networking events for your industry to get to know prospective investors.

Quick tips: How to get investors for your business

The best way to get the attention of an angel investor is to have a solid idea and business plan, according to Business.com. Pitch your story in a way that is easy to digest – for instance, in the form of a slide deck.

A business plan should cover how your company will operate, your mission, marketing strategy and financial projects, according to the Library of Congress.

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Business insurance typically includes property insurance, liability insurance and business interruption insurance. It can even help cover equipment that breaks down.