The Five Main Types of Angel InvestorsApril 01, 2020
From an entrepreneur’s perspective, understanding the key types of angel investors and their respective philosophies is important for two main reasons:
- So you know what you’re getting into when you make a deal with an angel investor.
- So you can customize your pitch.
With that in mind, here’s your essential guide to angel investor types and philosophies:
Relationship angel investors
These are either family members, friends, or former co-workers. The main reason they are investing in your business is you. They know you, and they trust you. A lot of startups are funded by relationship angel investors, so it’s a perfectly acceptable way to get funded. However, it’s critical that everyone involved has realistic expectations because, in addition to money, relationships are also on the line.
Idea angel investors
These angel investors have history and expertise in the domain they’re investing in. For example, if they’re investing in mobile gaming, they’ll likely come from a mobile gaming background. From an entrepreneur’s perspective, this is probably the best type of angel investor to have on board. The two big reasons are:
- This type of angel investor can validate and refine your idea. Since he understands the industry, he knows when he sees a winning idea and he might have valuable tips to avoid pitfalls and make the idea even better.
- This type of angel investor can provide valuable contacts. Her years of experience in the industry means she can connect you with the right people to help you succeed.
Calculating angel investors
All angel investors are looking to make money, but some are significantly more deliberate in their approach. These “calculating” angel investors, who typically have a portfolio of dozens of startups, consider data like startup success rates and average acquisition valuations, then place their bets accordingly.
Calculating angel investors can be subdivided into two basic groups:
- Big hitters. These angel investors are looking for unicorns. If they can get in on the ground floor of a startup that becomes the next Facebook, it doesn’t matter that the 30 other ideas they invested in failed utterly. One homerun more than makes up for striking out dozens of times. For some entrepreneurs, these investors can be great because they are unlikely to negotiate hard on the early valuation of your business, and they take a hands-off approach. This makes them a relatively easy, low maintenance source of money.
- Consistent hitters. These angel investors need a much higher percentage of their investments to pay off. Their strategy is based on the fact that most startups exit through acquisitions at valuations less than $40 million. Consequently, they look much more closely at the numbers when making a deal. As it’s more important for these angel investors to get favorable terms, they’re likely to negotiate much harder at the early stages. From an entrepreneur’s perspective, this can, paradoxically, be a godsend, as a lower initial evaluation will make your startup more attractive for later rounds.
These angel investors have a track record of making a lot money for other angel investors by bringing them on board to projects that become successful. From an entrepreneur’s perspective this is a great person to have on your team because she will bring a lot of other quality investors and connections to the table.
The most likely scenario is that your startup will be funded by a combination of one or more of the above angel investor types, each coming with her own slightly different strategy and perspective. As an entrepreneur, wherever possible, you should focus on attracting idea investors.
Regardless of what type of angel investors you take onboard, you should know that professional angel investors are prepared to “follow-on” in subsequent funding rounds beyond seed funding. In fact, many angel investors look at the seed round primarily as a way to get a seat at the table for subsequent rounds, where they may end up investing significantly more into a startup.
Read more: Startup Funding Rounds Explained
Still confused about the process of getting funded by an angel investor?
Read more: How Do Angel Investors Fund Startups? From initial pitch to funds in the bank: your essential guide to startup deal flow