What even is angel investing?

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What even is angel investing? A beginner’s guide

Angel investing is one of the most exciting, high-risk, and potentially rewarding ways to participate in the world of finance. But for those unfamiliar with the term, it can sound like something mystical or exclusive. And, to be fair, up until recently, it has been pretty exclusive! But thanks to Shuttle, more investors can share in the exciting and potentially high-yielding opportunities that come from investing in high-growth startups.

So, what even is angel investing, where did it come from, and how does it fit into a balanced portfolio? Let’s dive in.

Simply put, an angel investor is an individual who provides initial seed money for startup businesses, usually in exchange for ownership equity in the company. This type of financing is pretty critical for early stage startups who might not be established enough to raise venture capital or debt financing. And while angel investments are most common in the earliest stages of a startup’s life, they’re regularly seen in the makeup of the financing rounds of more established companies too.

How did angel investing start?

The term "angel" originally came from Broadway theatre, where it referred to affluent individuals who backed theatrical productions that might have otherwise failed. But it wasn't until 1978 when William Wetzel, a professor at the University of New Hampshire and the founder of its Center for Venture Research, conducted a groundbreaking study on how entrepreneurs in the U.S. secured seed funding that it became known as ‘angel investing’. 

It then began gaining traction in Silicon Valley as technology startups like Apple, Microsoft, and Google began to emerge and early investors recognised the potential they had. And while the term ‘angel’ wasn’t coined until 1978, there were, of course, individual investors who backed entrepreneurs prior to this. Take J.P. Morgan’s investment in Thomas Edison or George Westinghouse’s investment in Nikola Tesla for example. We can thank both for the electricity that powers much of our lives today!

How angel investing shapes the business world

Angel investing has significantly reshaped the business landscape by strengthening the startup ecosystem. With financial backing from angel investors, numerous startups have turned their ideas into successful ventures and become widely recognised brands. And without angel investors giving them their shot, many of the companies we know today might not have made it! Angel funding is especially vital when startups are at their most fragile, providing them not only with capital but with strategic guidance and mentorship to help them navigate the challenges of launching a business.

This evolution in financing has made entrepreneurship more accessible, enabling passionate individuals to pursue their ambitions without relying solely on traditional funding sources. By introducing new ideas and products to the market, angel investing fuels innovation and drives industry progress. Moreover, it has contributed to a cultural shift that celebrates entrepreneurship, encouraging more aspiring founders to take risks and think creatively. As success stories from angel-backed startups continue to emerge, the cycle of investment and innovation strengthens, fostering an environment where ambition and creativity can continue to grow.

Well known angels and big returns

As you can imagine many well-known angels have made incredible sums of money from investments in companies that have gone on to become massively successful. To name a few:

1. Ron Conway
   Known as the “Godfather of Silicon Valley,” Conway was an early investor in tech giants like Google, Facebook, and PayPal. His ability to spot and nurture game-changing ideas is legendary.

2. Peter Thiel
   A co-founder of PayPal, Thiel invested $500,000 in Facebook in 2004, securing a 10.2% stake. That investment turned into billions when Facebook went public.

3. Esther Dyson
   A prominent angel in the tech and health sectors, Dyson has backed startups like Flickr, 23andMe, and Evernote. She’s also known for her role in advocating for ethical and impactful investing.

4. Chris Sacca
   A divisive character in Silicon Valley, Sacca was a Google Executive who left to start investing in startups and eventually went on to become a venture Capitalist. He’s invested in companies like Twitter, Stripe, and Instagram. As well as a $300,000 investment in Uber’s angel round bagging him 4% of the company. Randomly enough, he also studied at University College Cork for a short period!

5. Andy Bechtolsheim
   The Sun Microsystems co-founder made a $100,000 cheque out to Google after watching Larry Page and Sergey Brin demonstrate their search-engine software. The check was uncashable at first, as a legal entity, Google didn’t exist yet, but once the company’s incorporation papers were completed and filed, the money enabled Page and Brin to move out of their dorm rooms.

Angel investing’s place in a well-balanced portfolio

Angel investing was once the exclusive playground of the ultra-wealthy Silicon Valley insiders and high-net-worths who had the capital and connections to back the next big thing. But the landscape is changing. Barriers are coming down, allowing everyday investors to participate in early-stage startup investing. And because it's no longer reserved for the elite, retail investors can now claim their seat at the table and back high-growth companies that were once out of reach. The future of investing is no longer just about who you know, it's about access, and access is expanding fast.

So, is it for you?

Angel investing can deliver life-changing returns, but it comes with significant risks. Many startups fail, leaving investors with nothing. This makes it critical to approach angel investing as part of a diversified investment strategy and to spread your risk across multiple investments.

Here’s how it fits into a balanced portfolio:

1. High Risk, High Reward
   Angel investing is considered an alternative investment class, much like private equity, or real estate. It’s important to allocate only a portion of your portfolio to angel investments, depending on your risk tolerance and financial goals.

2. Long Time Horizons
   Startups often take 5-10 years to deliver returns, if they succeed at all. Patience is key, as liquidity (the ability to access your money) is extremely limited.

3. Diversification
   To reduce risk, angel investors often build a large portfolio of startups. Spreading investments across multiple industries and companies increases the likelihood that you’ll land on a big winner.

4. Due Diligence Is Critical
   Successful angel investing requires thorough research. Investors need to assess a startup’s business model, market opportunity, team, and financial projections. Products like Shuttle make it easier for new investors to piggyback on the knowledge of highly-experienced institutional investors.

Angel investing isn’t for everyone. It requires capital, a high tolerance for risk, and a willingness to wait for long-term results. But for those who are passionate about supporting innovation and willing to take calculated risks, it can be a rewarding way to grow your wealth and make a positive impact.

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The Unsophisticated Investor is brought to you by Scott & Rob, the founders of Shuttle. We’re both sick of private markets being a playground exclusive to the ultra-wealthy so we started a company to challenge the status-quo. Shuttle’s singular focus is to unlock private markets for Millennial and Gen Z retail investors and help them build wealth through the highest performing private market opportunities.

Scott & Rob
Shuttle Co-Founders