Angel Investor Definition

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on January 11, 2021

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.

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.

 

Angel Investing FAQs

An angel investor is an individual or group who provides early financial backing to startups for entrepreneurs with limited access to capital.
Angel investors make money by investing in companies in exchange for ownership equity. If a venture performs well, the angel makes money through their sale of ownership equity of the companies they own a stake in.
Angel investments are a high-risk, high-reward undertaking. That is because most new ventures fail, while some ventures end up performing extraordinarily well.
The purpose of an angel investment is to support businesses that show high potential but that may not have access to traditional financing.