Understanding Angel Investors: Definition and Role in Startup Funding

Angel investors are essential to the ecosystem of startups because they do more than just give money. These people may have lots to offer that can help new businesses do well. In addition to much-needed risk capital, they may know a lot, have good strategic ideas, and have connections in the industry. This article looks at what angel investor is, what they do in the world of entrepreneurship, and what benefits they can bring to the startup ecosystem.

Angel investors are individuals who invest in businesses and are also known as angel funders, private investors, seed investors, or business angels. Most of the time, wealthy or high-income individuals give money to new businesses in exchange for shares and sometimes other instruments such as a SAFE (simple agreement for future equity) note or convertible debt. Angel investors have two avenues that today increasingly overlap or are complementary to each other. A highly popular option in recent years is through online platforms such as equity crowdfunding platforms and joining angel investor groups or networks. 

What is the difference between the two options? Equity crowdfunding platforms are licensed fintech companies that help startups and small businesses to raise funds. They provide a wide range of legal and structuring-related services, ensure that key information about the business offering is disclosed clearly, provide a good user experience to simplify the process, and are also a magnet attracting both startups and investors. An angel group is more focused on the relationships and interactions of members and networks and, at times, has led investors who take the lead to decide which startups to invest in. Such groups may be formal or informal and may not provide the additional services provided by platforms. As such, there is potentially great synergy and benefit for both sides to come together. 

Ethis’s angel group HASAN – short for Halal Startup Angel Network – actively leverages on and coordinates with equity crowdfunding platforms including our own licensed platforms in Malaysia and Oman.

For Shariah-conscious investors, angel investments to gain shares are fundamentally Halal in terms of the contract of the transaction. Additionally, such participatory investments that support real-world economic activity are encouraged in Islam. However, there may be elements of Shariah non-compliance in other common contracts used in the market that have debt-like features, such as SAFE notes and convertible debts. Also, since angel investors become shareholders or part-owners in startups, there is the need to ensure that the business itself is halal in terms of its business activities, practices, and any exposure to interest-bearing income or loans.

What does angel investor mean?

Angel investors support startups by providing funds, guidance, and access to valuable networks. They can do much more than just give capital, which makes them very important to the growth of early-stage businesses.  Angel investors provide support in many ways, including by sharing their knowledge and resources to drive innovation and shape the future.

While the common strategy is to invest a small portion of an investor’s portfolio in angel investments, there are individuals who decide to invest a large portion of their funds in startups. The attraction to do this is typically due to the thrill and fulfillment of investing in the next big thing and of course, the potential for market-beating returns. On Ethis, we have Hasan Angels as a forum for angel investors who come together to invest in Sharia-compliant startups with the potential for substantial financial returns.

The Pros and Cons of Angel Investors for Startups and Entrepreneurs 

Pros of Angel Investors:

• Angel investors provide capital to new businesses that may have few other options to obtain funding.

• Angel investors may be experts in their fields and can give helpful advice and mentorship to entrepreneurs.
• Angel investors may have a lot of contacts and can help entrepreneurs find partners, customers, and more funding.
• Angel investors are more willing to take a risk and fund new projects than other investors. This means that they are eager to take risks on new ideas and markets, which can increase a startup’s chances of getting funding.
• Angel investors are fast and flexible and can make much faster decisions compared to larger institutional investors. This helps entrepreneurs get the funds they need to grow their businesses faster.

Cons of Angel Investors:

• When business owners get money from angel investors, they have to give up a certain amount of ownership.
• Angel investors generally allocate comparatively smaller amounts of investment, necessitating a substantial expenditure of time and effort to secure multiple angel investors in case of a significant capital requirement.

How Do You Raise Angel Funding?

To raise angel funding for our business, we can follow these steps. There’s an excellent way called Equity Crowdfunding (ECF). It’s all done online through unique platforms connecting you with many potential investors. Understanding Equity Crowdfunding (ECF) Platforms: ECF platforms are websites where you can show off your business idea and get money from many people who want to invest. You can get smaller amounts from many people instead of getting a significant amount from just one person. These platforms help you find investors who believe in your idea and want to support you.

• Registering and Creating an ECF Campaign: First, sign up on an ECF platform you like. Then, you create an excellent presentation about your business. You explain what your company does, why it’s unique, and how you plan to make it successful. This presentation is like your online pitch to get people interested in investing.
• Engaging Potential Angel Investors: ECF platforms allow you to talk to potential investors and answer their questions. You can join live webinars, ask-and-answer sessions, and speak in online forums. Being friendly and responding quickly is essential to show that you care about their support.
• Showing Business Potential and Financial Projections: To convince people to invest, show them how your business can grow and make money. You explain why your idea is unique, who your customers are, and how you plan to make a profit. It’s also important to have realistic numbers and do research to back up your claims.
• Using Social Proof and Handling Questions: On ECF platforms, they sometimes show how many investors have already given money and how much has been raised. This helps other investors feel confident about supporting your business. Also, be ready to answer any questions investors have about your business. Being honest and open builds trust.
• Following Rules and Legal Stuff: When using ECF platforms, you must follow your country’s rules and laws. This means being transparent about your finances, following the guidelines for raising money, and being clear about the risks involved. Doing things legally is essential, and ensuring your investors are protected.

How Angel Investing Works?

When we talk about angel investing, here’s a simple overview of how it works:

• Investor due diligence: Before angel investors decide to invest in a startup, they do thorough research and analysis. They want to ensure it’s an excellent opportunity with potential success.
• Negotiating terms: When an entrepreneur and an angel investor agree to work together, they need to talk about the terms of the investment. This means figuring out how much the company is worth, how much equity the investor will get, and other factors.
• Investment and ongoing involvement: Angel investors fund the startup once the investment is made. But it’s not just about the money. They may also stay involved with the business, offering mentorship, advice, or even joining the company’s board to help it succeed.
• Exit strategies: Angel investors usually aim to get a good return on their investment. They strive for an exit strategy, which means finding a way to cash out their investment. This can happen through selling the company to another company or publicizing it through an IPO.

In a nutshell, Angel investors mean helping investors with their research, investment terms, funding, and finding a way to exit successfully.

Angel Investors vs. Venture Capitalists

Angel investors and venture capitalists have significant differences that you should consider.

Angel investors invest in new startups, while venture capitalists invest in companies that have already shown their potential and are established. Angel investors give money to start-up businesses. Venture capitalists invest in companies that are further along and need more significant investments.

Angel investments can be a small amount, like a few thousand dollars, or a more significant amount, like a few million dollars. Venture capitalists usually invest much more money, like millions or even tens of millions.

Regarding the size of their investments, angel investors usually give less money than venture capitalists. Venture capitalists invest a lot of money, usually millions or tens of millions. Angel investors invest less money, usually from a few thousand to a few million dollars.

One big difference is how much control and participation are involved. Angel investors help entrepreneurs they invest in by providing guidance, mentorship, and industry expertise. They are often more involved in the process. They are trusted advisors and can take part in making decisions. However, venture capitalists may need more control, such as a seat on the board of directors and more say in important strategic decisions.

In summary, Angel investors typically invest in startups in their early stages. They usually provide smaller amounts of money and are very involved in helping the business succeed. Venture capitalists invest in older companies, give more money, and may have stricter rules.

How To Find an Angel Investor

To find an angel investor for our business, we can follow these steps:

• We must attend events in our industry to meet angel investors interested in businesses like ours, like networking events. Attending these events is a great way to meet investors and discuss our business ideas.
• We can use Equity Crowdfunding (ECF) which links entrepreneurs with angel investors to get funding. It helps to showcase business, discover investment opportunities, and connect with potential investors.
• To find angel investors, reaching out to people in our network and asking for referrals or introductions is essential. We can contact mentors, business partners, or industry contacts with links to potential investors. 

Who Can Be an Angel Investor?

Becoming an angel investor involves meeting specific eligibility criteria. Here are the key factors to consider:

Accredited investor status: In many places, angel investors must make a certain amount of money or wealth to qualify. These limits are set to ensure buyers are financially stable and can handle the risks of angel investments.

Knowledge and experience: Angel investors often bring valuable industry-specific expertise. They have a deep understanding of the industry in which they invest, which lets them give entrepreneurs they help helpful advice and tips. This expertise is beneficial for both the investor and the startup seeking funding.

Why are angel investors important to businesses?

Angel investors provide funding for startups in their early stages. Angel investors give essential knowledge that helps them deal with the challenges of starting and growing a business. Angel investors can help you connect with many people who could help your business grow. They might introduce you to potential partners, customers, or expanding opportunities.

When an angel investor gets involved in a business, it becomes more credible and trustworthy. This can make other investors, clients, and partners more likely to trust the company. Angel investors often act as mentors, giving business owners advice and holding them responsible for what they do. They help entrepreneurs create a suitable environment for learning and growing. They also help them overcome challenges and reach their goals.

How does it work?

• Initial engagement:
  • The business owner who wants money from investors makes a detailed business plan, pitch deck, and financial forecast. Entrepreneurs can find angel investors through personal networks, business connections, or angel investor networks. First, meetings or pitches are set up to explain the business idea, discuss possible funding, and see how interested investors are.
• Due Diligence:
  • We will meet with the entrepreneur and essential team members to complete the process. We will also look at financial records, do market research, and review legal documents, among other things. The angel investor does research on the company before making an investment decision. They look at whether the company is workable, its potential in the market, and any risks involved.
• Financial investment:
  • The angel investor can give money to the business all at once or in smaller amounts as the business meets specific goals or benchmarks. Companies need money to run their business, make new goods, advertise, and grow.
• Active involvement:
  • Depending on the terms of the deal, the angel investor may be involved in the business as a mentor or assistant. They help business owners reach their goals by giving them good advice, sharing their knowledge, and using their network. Participation can be as simple as checking in regularly or as involved as having a big say in important decisions.
• Exit strategy:
  • The investment agreement usually explains the investor’s plan for leaving the investment. This plan explains when they can sell their shares or get their money back. The sale of the company to a strategic buyer, an initial public offering (IPO), or acquisition by another business are standard exit plans.

Conclusion

Angel investors have a significant impact on how well startups do. They help entrepreneurs make their business ideas work by giving them access to money, knowledge, contacts, and mentors. Angel investors do more than just give money. They give legitimacy, approval, and strategic direction as well.  Angel investors are still significant in helping new businesses grow and succeed. They provide money, support, and encouragement for entrepreneurs who want to make a difference in business.

Join Hasan Angels (Halal Startups Angels Networks), an angel investor network under Ethis that provides a platform for Muslim investors to invest in businesses that comply with Islamic values. This guarantees that investors can invest with confidence, knowing that their investments are halal and in accordance with their religious beliefs.