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3 Quick Points to Simplify an Angel Investor
How small startups raise money at their earliest stage
An angel investor is a high-net-worth individual that provides financial backing to startups at their earliest stages in exchange for ownership equity in the company. The financial backing an angel investor provides typically helps a startup get its business off the ground from the idea stage to something that can eventually start to make revenue. The three following points will help to further simplify who angel investors are and what they do:
1. Origins of Angel Investors
2. Who Can Be an Angel Investor?
3. Angel Investor Profile
1. Origins of Angel Investors
The term angel investor was first used by the University of New Hampshire’s William Wetzel, founder of the Center for Venture Research. Wetzel coined the term in 1978 after completing a study on how entrepreneurs raised capital for businesses. He used the term to describe investors who supported startups with seed capital.
2. Who Can Be an Angel Investor?
Angel investors are typically individuals who have gained accredited investor status, but it is not required. The Securities and Exchange Commission (SEC) defines an accredited investor as an individual who has a net worth of $1 million or more, or an individual earning $200,000 or more in income for the previous two years, or a combined income of $300,000 for a married a couple.
3. Angel Investor Profile
Angel investors use their own money to invest in startups at their earliest stage. It is one of the riskiest forms of investing because if a company fails, an angel investor will likely lose all or most of the money they invested. Today, Angel investors look for opportunities to invest in startups with a defined exit strategy, whether being acquired or going public via an initial public offering. According to the Angel Resource Institute, the effective internal rate of return for a successful portfolio of angel investors is approximately 22%.
Angel investing has grown in popularity over the last few decades as the lure of startups that can potentially become billion-dollar companies has raised. It is not an easy form of investing as most angel-backed startups will fail. Angel investing can be seen as the riskiest form of investing, followed by venture investing, which typically involves investing in startups that have some product-market-fit and revenue. One thing you cannot question about angel investing is that it has fueled more innovation, especially when it comes to an individual highly motivated to establish a world-changing idea but does not have the capital to start.
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