I have been on both sides of the Angel Investment table. I have been an investor in several companies and I have used Angel financing to start companies. I get a lot of questions from first time entrepreneurs about where to find Angel Investors.
I'm not talking about Angel Funds, where a group of Angels pool their money to make investments. These groups are often a fine bridge between independent Angel Investors and Venture Capital Funds. For the purposes of this article, I'm referring to individual Angel Investors that are often the only source of financing to startup entrepreneurs.
Before going into the types of Angel Investors, it makes sense to understand the motivations of these investors. In my experience, things other than financial return often motivate Angel Investors. Perhaps they are interested in the product you envision, or are a friend that wants to help out, or maybe someone that has had success and just wants to give back. All of these are perfectly valid reasons to invest, but knowing the motivations behind an Angel Investor is key to a healthy working relationship that could last a decade or more.
Here's a look at the five Angel Investor types:
1) The Family Investor
The Family Investor is not really a classic Angel Investor at all, but a supportive family member that "knows you." Their motivation comes from the interest in supporting a family member or friend. Their basic investment thesis is that they trust you. This is my least favorite investor because the investment is totally emotional and personal. Based on the financial situation of the individuals involved and the relationships, this can work if everyone comes into the situation with their eyes wide open.
2) The Relationship Investor
The Relationship Investor is a co-worker from a previous company or a business friend that you have known for a while. This investor may or may not understand what your new company is doing, but has a track record working with you. They want to be supportive on the one hand, but are also looking for a return. The investment from a Relationship Investor is likely not trivial, but you won't lose them as a friend if things go badly. In my experience these are good Angels to have. Again, as long as everyone has his or her eyes open at the beginning. The Relationship Investor can also be wildly supportive in terms of finding employees and other resources.
3) The Idea Investor
The Idea Investor is probably very familiar with the space your company is targeting. This is, in some ways, the very best type of Angel Investor because to some degree this person can validate your idea. Their investment is based on the idea and there is little emotion around the table (always a good thing). If you can get them onboard they can open doors into partner relationships and give good advice. You will spend most of your time convincing the Idea Investor that you and your team are the right people to attack the problem (as they don't have a strong relationship with you or the team). Often an influential Idea Investor makes a good early board member for the company.
4) The Once Removed Investor
The Once Removed Investor is likely connected through a personal or professional relationship with either the Relationship Investor or the Idea Investor. They likely don't know you, and don't have a clue if your idea is good or bad. They trust someone else to bring them successful investment opportunities. This is a great way to get additional Angel Investors onboard, but without a solid Relationship Investor or Idea Investor it is unlikely to happen.
5) The "Archangel" Investor
An "Archangel" is a Relationship Investor or Idea Investor that has a track record of success making other Angels (and perhaps non Angels) money. They have built a successful company in the same space, or have strong personal contacts with other Angel Investors. These people are valuable because they can be very influential attracting quality Once Removed Investors. If you can find this person and get them excited about your deal, do it. Be careful with the "Archangel" type, however. There are a lot of people that pretend to be "Archangels" and offer to connect you with people that have money, sometimes for a fee. If your "Archangel" Investor is not actually investing his or her money, but simply acting as a proxy for others take note; that is a warning sign.
In reality, your successful Angel financing will come together with a mix of the first three investor types plus a few Once Removed Investors.
The bottom line on Angels, spend your time looking for solid Relationship Investors or Idea Investors, they are the ones that will get you over the hump. Bring a few Family Investors along for the ride if you believe the relationship can survive it, and mix in a good set of Once Removed Investors to round out the raise.