Angel Investing: Getting Started

Angel investing, put simply, is equity finance for privately held businesses. Angel investors are typically high net worth individuals who choose to invest in promising businesses, startups, and ventures with their personal disposable finance.

Angel investors are commonly market leaders in a specific industry and are able to make their own decisions about which businesses they invest in, and how. Angel investing is relatively straightforward: an angel investor will offer a promising startup equity finance in return for an equity stake — shares in the business they are investing in.

Working with an angel investor can provide growing businesses with a wide range of benefits. The support that angel investors provide isn’t limited to capital — an angel investor is highly focused on the success of the businesses they invest in, and often provide experience, knowledge, and network connections.

Some angel investors invest alone, while others invest as part of a group of angel investors, referred to as a syndicate. Angel investors have individual preferences regarding the industry they want to invest in and the scale of their investment. Angel investment amounts can vary wildly, scaling from $10,000 to $500,000. The growing popularity of syndicates amongst angel investor groups can push investment amounts far higher.

Most angel investors anticipate returns on their investment over a period of 3 to 8 years and are focused on investing in businesses that fulfill specific criteria to support this requirement.

Angel investing is one of the largest sources of funding and investment for early-stage and startup businesses seeking capital to launch their businesses. Determining the exact size of the Australian angel investing market can be complicated, as many angel investors choose to invest privately.

Angel investors and syndicates are less likely to publish public details of investment statistics. Popular startup and angel investor platform AngelList documents over 1,500 individual angel investors throughout Australia.

The sum of all angel investments in Australia varies greatly based on market conditions, with the total amount of seed-stage deals ranging between $280 million in 2016-17 to just $90 million in 2019.

Australian angel investing is largely governed by the Corporations Act 2001. The Australian Securities and Investments Commission provides extensive detail on the regulatory framework regarding equity finance in Australia.

In July 2016, the introduction of the Australian Government’s National Innovation and Science Agenda reforms provided Australian angel investors with specific capital gains tax exemptions and non-refundable carry-forward tax offsets on certain investments, particularly via the ESIC Tax Offset initiative.

Angel investment and venture capital finance are two methods used by startups and growth-stage companies to generate the capital needed to launch or scale. The key difference between venture capital and angel investors is that the former invests money on behalf of a fund, which must be profitable and deliver a return to the fund’s investors.

The high costs associated with venture capital administration means that VC must be highly selective when determining which businesses to invest in, and generally only invest in businesses that are highly likely to deliver a return to the fund. VC funds are far more risk averse when compared to angel investors, and therefore make fewer small-scale investments in seed stage businesses.

Angel investors, however, are not restricted by the same limitations that impede VC investors, and are therefore more likely to invest in new ventures and invest in businesses or startups that don’t attract the attention of the VC market.

Unlike investments in traditional managed funds, angel investors retain full control over their investments and are able to make decisions about where they invest. In most cases, angel investors are directly engaged with the entrepreneurs and startups they invest in, from early pitches to advisory roles.

Angel investors often engage directly in the due diligence process when assessing potential investments and take a direct hand in the investment process, acting as signatories on legal investment documentation.

Angel investments vary wildly, scaling between $10,000 and $500,000. Data published by Forbes reveals that angel investment activity exceeds $24 billion USD annually, spread across an average of 64,000 startups around the world.

The average angel investment across all markets is $36,000 USD, with most investments spread between $25,000 and $100,000. Angel investment sizes vary based on the disposable wealth of the investing individual and the opportunity they are investing in.

Angels that invest as part of a syndicate often pool capital and experience, leading to larger investments.

In most cases, angel investors demand up to 20 percent equity in return for investment. Angel investment equity distributions rarely exceed this figure, as startup founders and entrepreneurs must be incentivized to grow and scale their business.

Angel investors often invest at pre-seed stages, which limits the total amount of equity a startup or new business is able to dedicate toward early stage equity financing — startups need to leave equity available for future funding rounds. It’s not uncommon for startups to seek several pre-seed or seed funding rounds. For more information on funding rounds, see the Fullstack guide to Funds for Startups: Series A, B, C, & D Rounds.

Startups and businesses are able to seek angel investing during a variety of business development stages. Pre-revenue, pre-profit, and profit generating businesses are all possible investment opportunities to angel investors.

A pre-revenue business or startup should be able to provide angel investors with evidence that their concept is capable of generating profit, such as proven customer interest, a functional MVP, other evidence that their business works.

When presenting a business concept to angel investors, founders and entrepreneurs should be able to demonstrate that they have taken steps to secure a position in the market, such as securing intellectual property or patents — a business seeking patent funding, however, may want to attract angel investors in order to complete a patent application.

Startups and businesses that are already generating profit or revenue are more likely to capture the attention of angel investors, as these businesses are able to deliver a higher likelihood of return.

For more information on startup funding, see the Fullstack guide to Startup Funding,

Pre-revenue businesses are often high-risk investments for angel investors. Businesses or startups at this stage must be able to demonstrate a proof of concept or possess a unique proprietary idea such as intellectual property. Pre-revenue businesses in proptech, medtech, and other deeptech or science-based industries are more likely to approach angel investors at a pre-revenue stage.

Pre-revenue businesses at a conceptual stage are typically unsuccessful in capturing angel investor attention unless the founders have a good track record. Businesses that are still in an ideation or conceptual stage should pursue accelerator or incubator programs in order to develop their idea and network with key VC and angel investors prior to approach.

For further detail on alternative funding options for early-stage or conceptual startups and businesses, see the Fullstack guide to The Self-Funded Startup.

People doing angel investing assess a broad spectrum of factors when considering businesses and startups as investment opportunities.

The management team of a startup is the most significant aspect of any business when examined by angel investors. The experience, track record, key capabilities, presentation, and motivation of the founders and management team of a business is critical. After assessing the team behind a startup or business, angel investors will assess the business itself.

Not all businesses and startups are prepared to approach angel investors. Businesses seeking equity finance from angel investors should be able to meet a number of requirements, which include:
1. Solution-focused: A business seeking equity finance should solve a real problem faced by their target customer segment.
2. Disruptive: successful startups have a significant impact on existing market structures or are able to establish a new business niche.
3. Protected: The product, service, or technology developed by a business should be supported by intellectual property, patents, or other proprietary elements such as copyright or branding. Businesses should be able to prove they own the concept that drives their business.
4. Competitive: A business approaching angel investors should present a highly defensible market position — if there are competitors in the market a business intends to operate in, angel investors should be able to identify the unique value proposition that delivers first mover advantage to a business.
5. Revenue: Startup founders and entrepreneurs should provide evidence that their business concept is currently generating income or will be able to do so in future. Clearly identifiable revenue streams and positive profit/loss projections are critical to securing funding.
6. Scalability: All successful businesses have the capacity to scale. Angel investors look for startups that have the potential to support explosive growth.
7. Validation: The core concept or offering of a business should be validated by real-world evidence — businesses that have already brought their product or service to market should be able to demonstrate market interest. Pre-launch businesses should present positive market testing responses.
8. Market size: A successful business operates in a market large enough to support it. Angel investors want to invest in businesses that are able to capture a realistic potential market share.
9. Exit strategy: Angel investors ultimately invest in businesses for profit — a business seeking equity finance should present a viable exit strategy.
10. Equity: Angel investors are hands-on investors that want to actively participate in the direction of the businesses they invest in, seeking investment opportunities that deliver both equity and interaction via a board.

Angel investors are a viable option for startup founders and businesses at critical growth stages seeking equity funding — but it’s important that early-stage businesses owners and entrepreneurs maintain an awareness of the key factors angel investors look for when investing before approaching them.