What Is An Angel Investor? 

The term "angel" symbolises hope and light and is said to have originated in the early days of Broadway in the US. At the time, investors investing in theatrical productions were called "angels". The term has since become widely used in the venture capital business world, and now it refers to private investors who supply capital to startups in exchange for future profits¹. 

Angel investors are often business professionals, successful entrepreneurs or individuals or families with high income or net worth. In addition, there are a number of angel investment funds or crowdfunding platforms around the world that raise pools of money in groups, allocating investment funds to promising startup firms². 

How Do Startups Approach Angel Investors?

As angel investors often invest independently³, compared to venture capital funds that are professionally managed, there isn’t a unified or standard criteria for investment. Startups may get to know angel investors through various channels, such as word of mouth, seminars, conventions, or referrals from government or university organisations². Some angel investors may even decide to invest based on just one business idea². 

As the trend of venture capital has matured in recent years, there are more angel investors interested in entering the market. Some angel investment groups have taken up the role of a third-party middleman between investors and entrepreneurs, moving beyond reliance on reputation and personal networks for investment matching. Instead, they proactively offer startup firms financing solution suggestions or collaborate with government-sponsored grant schemes⁴. 

Difference Between Angel Investors And Venture Capital Funds

Entrepreneurs may obtain their first small-scale investment from their family, friends and personal networks at the earliest stages of a startup. If they catch the eye of an angel investor or venture capital fund, they may have the chance to secure more funding to support the company's development³. Both angel investors or venture capital funds tend to invest in startups, but there are differences in the timing of investment, the investment amount, capital management style, and the industries they invest in, etc. 
 

Characteristics of Angel Investors³
●    Tend to inject their own capital directly into a startup at the early funding rounds. 
●    Seek future returns through the forms of debt or equity. 
●    Experienced angel investors may become directors or advisory board members, offering entrepreneurial advice. 
●    The sectors and types of companies invested in depend on the angel investors' personal insights, preferences and liking. 

Characteristics of Venture Capital Funds³
●    Venture capital funds have a long time horizon regarding financing cycles, from a company's early establishment to acquisition or initial public offering. 
●    Venture capital funds are managed by specialists, with operations that typically span at least ten years.  
●    Invest in portfolio startup companies, exit at a specific time and return profits to the fund's investors.
●    Venture capital funds may take a seat on the board of directors or advisory board. 
●    Each venture capital fund has its industry investment focus. 

Industries Angel Investors Like To Invest In

According to the ACA Angel Funders Report 2022, industries such as innovative technology, digital finance, energy, software and applications, etc, are of interest to angel investors⁵

Accept The Benefits And Limitations Of Angel Investment 

Compared to venture capital funds and other funding schemes for startups, the investment process of independent angel investors could be relatively simpler, primarily involving initial negotiations, due diligence, reaching a verbal agreement, and signing legal agreements². Terms of investment, equity shares, investor rights, etc, are then determined based on mutual desires and consensus. 

As for limitations and drawbacks, the personal business experience of angel investors may be the biggest consideration factor for entrepreneurs².  If the angel investor is overly involved or lacks practical business experience, novice entrepreneurs may feel overwhelmed².  Startups may face more uncertainties when accepting investment from angel investors compared to accepting investment from professionally managed venture capital funds². 

Raising funds is an important lesson that every entrepreneur needs to face. Are you in need of funding in your entrepreneurial journey? DBS SME Banking offers financial assistance and support startups may need.  Click here and learn more about SME Business Instalment Loan. 

To borrow or not to borrow? Borrow only if you can repay!

The above information is only for your reference. For detailed information, please refer to the sources and seek professional advice if necessary. 

Article published on 30 Sep, 2024

1Source: Youth.gov.hk - Inno-dictionary "Angel investors" (Chinese - only) (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.youth.gov.hk/en/hashtag7b11.html?hashtag=Innodictionary) 

2Source: Forbes Advisor - What Are Angel Investors? (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.forbes.com/advisor/investing/what-are-angel-investors/)  

3Source: US Securities and Exchange Commission - What are the differences in friends and family, angel investors, and venture capital funds? (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.sec.gov/education/capitalraising/building-blocks/investor-types)

4Source: Angel Investment Foundation - Who We Are (https://www.dbs.com.hk/sme/disclaimer.page?url=https://aif.hk/en/whoweare/ )

5Source: Angel Capital Association - ACA Angel Funders Report 2022:  More Data + Industry Insights and Real Stories (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.angelcapitalassociation.org/angel-funders-report-2022/)

^{^}Terms and conditions apply.