What Exactly is Angel Investing?

There are many different types of investing, but few with so heavenly a name as “angel investing.” What exactly is angel investing, and is it as diving as it sounds? Well, that depends on who you are and what you’re trying to get out of your participation in the investing game. Here are some things you should know.

Who are angel investors? Generally speaking, an angel investor is a private investor (not affiliated with an investment fund or brokerage) who puts private money (money that is not tied up in a business) into investments. Also called informal investors, angel investors are typically just affluent people who are interested in growing their money. They are called “angels” because, as the people they invest in see it, they are often a saving grace for businesses that otherwise have little to no funding options.

What do angel investors invest in? Business startups are the angel investor market. Some angel investors prefer to put their money into business startups they feel close to, for any of a number of reasons, and so they tend to stick with niches that are close to their heart (an angel investor who is a real estate developer might choose to only invest in real estate development startups, for example). They usually have a lot of skill and knowledge about how to trade in the stock markets as well as how to invest in other types of ventures. However, other angel investors might approach their investments a different way, opting to pour a massive amount of time and resources into researching startups they feel will simply make them the most money.

How angel investments work. At the end of the day, angel investors are in business to make money, and they typically set up their investments to ensure that they ultimately benefit from the success of the startup. There are two common ways in which angel investors receive a return on their investment: ownership equity, or convertible debt. Ownership equity implies that the angel investor becomes part owner of the startup, thus increasing in net worth as the startup increases in value. Convertible debt works much differently: It is basically a bond (or IOU) that the angel investor holds, with an agreed-upon cash in amount and date.

Angel networks. It is a growing trend for angel investors to group together in order to pool their resources and share research in regards to potentially profitable investments. These are called angel networks, and they have a lot of power when it comes to providing high-dollar funding to large scale startups that can pay of big in the long (or sometimes even short) run.

Angel investing can be, so to speak, a God-send for startups that need that first leg up into big business. Of course, it can also be a very lucrative prospect for the angel investor. It is important to keep in mind that angel investing is a complex agreement between two (or more) parties, and one that comes with risk. Approach angel investing with prudence.