What Is Angel Investing and What Are Its Risks?
What Is an Angel Investor?
An angel investor, or angel donor, is an individual or group who provides early financial backing to startups or entrepreneurs with limited access to capital. Typically, this is in exchange for ownership equity. The angel funding provided may be a one-time investment or an ongoing flow of supportive capital. Angel investors provide support for new businesses at their earliest stages where the risk of failure is high.
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What Are Angel Investments?
The purpose of an angel investment is to support businesses that show high potential but that may not have access to traditional financing. Many new businesses do not have an established credit history, for example, and so may not have access to bank loans. Besides money, an angel investor may also make an investment deal for other reasons, such as:
- To provide mentorship to a new generation of entrepreneurs
- To keep current with developments and fund innovation in a field
- To allow others to make use of the investor’s connections and capital
Associated Risks of Angel Investments
Because of the high risk of failure associated with investing in new businesses, angel investing is unique in several ways:
- Angel investors have a higher internal rate of return than conventional investments—sometimes targeting 10 times their original investment.
- Funds provided by angel investors come from an amount that the angel can afford to lose.
- For this reason, angels typically do not allow angel investments to constitute more than 10% of their total investment portfolio.
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Need help finding an angel investor or interested in becoming one? Either way, let us know how we can be of help by reaching out to a financial advisor in Los Angeles, CA. If your residence is outside the vicinity, please visit our financial advisor page to see a full list of the areas we cover.
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About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.