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Updated September 15, 2023You’re reading an excerpt of The Holloway Guide to Raising Venture Capital, a book by Andy Sparks and over 55 other contributors. A current and comprehensive resource for entrepreneurs, with technical detail, practical knowledge, real-world scenarios, and pitfalls to avoid. Purchase the book to support the author and the ad-free Holloway reading experience. You get instant digital access, over 770 links and references, commentary and future updates, and a high-quality PDF download.
Definition Angel investors (angels or individual investors) are wealthy individuals who invest their own money directly into companies. Angels are almost exclusively active at the pre-seed and seed stages. The most comprehensive list of angel investors can be found on AngelList. Super angels are angel investors with a proven track record of successful investments as angels, but there is no agreed threshold distinguishing them from other angels.
controversy A lot of people don’t consider angel investors to be venture capitalists. In principle, angel investors are a kind of venture capitalist—they’re hoping to make money through returns on their investments into risky, early-stage businesses. But angels and VCs who work for firms with other investors’ money do have a different set of practices and priorities that set them apart from angel investors, including when they invest and how much. In practice, founders and investors generally do not refer to angels as venture capitalists.
Angel investing offers individuals an alternative model to institutional investment, in which they provide money to an entity, which in turn invests in companies. While some angel investors create business entities out of which they invest their money, the term institutional investor is rarely used to refer to them.
Definition Accredited investors are individuals, banks, corporations, or other institutions that hold unique investor status, because their accreditation is regulated by the Securities and Exchange Commission (SEC) and they meet net worth and income thresholds. Their status is based on asset thresholds (typically an individual net worth of more than $1 million or annual income more than $200,000 or $300,000 with spouse, for each of the last two years; or an entity with assets exceeding $5 million). Accreditation is meant to prevent unregulated investors from losing a meaningful percentage of their money on a risky investment.
important Not all angel investors are accredited, so it’s a good idea to check before accepting money from an investor. You can check with your legal counsel if individuals interested in investing don’t meet the standards, or use a qualified third party like VerifyInvestor.com or Early IQ to verify the status of an accredited investor.
According to 2018 data from AngelList, only 35 of more than 12K angel investors have made 50 or more angel investments, and only 116 have made 20 or more investments.* This list includes notables such as Esther Dyson, Reid Hoffman, Mark Cuban, Marc Benioff, Ashton Kutcher, Peter Thiel, Keith Rabois, Paul Buchheit, Alexis Ohanian, Ron Conway, and Naval Ravikant. Investing in 20 companies at a check size of $50K apiece comes out to $1M. Compare that with Ravikant’s reported 130+ investments at the same check size, and you’re looking at an individual who may have put as much as (or more than) $6.5M of their own money into high-risk ventures via angel investments.
Founders often raise some of their earliest funding from angel investors, in angel rounds, before moving on to entities like VC firms. We’ll discuss this in greater detail in our section on rounds. In general, the larger the check size, the more likely the check is coming from an entity.
Many super angels go on to start micro VC firms. Depending on whom you ask, these firms usually invest out of funds that are less than $100M and can invest at the pre-seed and seed stages.* When angel investors prove they’re able to repeatedly make investments into high-growth, successful companies at the earliest stages, other investors are interested in investing their money for the angel to manage in one of these micro VC funds. Ron Conway founded SV Angel for this purpose, Peter Thiel founded Founders Fund, and Naval Ravikant founded AngelList.
Many founders don’t start companies with pre-existing networks of venture capitalists and a wealth of knowledge on how to hire a team, build a product, get customers, and raise capital. Accelerators and incubators aim to fill this gap in network, knowledge, and skills. Accelerators and incubators have nuanced differences. Some invest small sums of money in exchange for equity, while others are just physical spaces that offer discounted or free space for founders to work while in the early stages of their businesses. If you’re a first-time founder, accelerators and incubators are worth considering.
caution When considering an accelerator or incubator, be wary. Most accelerators ask for 2–10% of your company in exchange for capital and connections. Make sure the connections will actually be worth 2–10% of your company! The amount of equity you sign over to an accelerator or incubator is literally a price you are paying for a service. Treat it as such.