A business angel (or angel investor) is typically a wealthy individual who provides financial support for early-stage startups, which are often associated with high risk, using their own personal funds. Unlike institutional venture capital firms, business angels invest much earlier in a company's life cycle, usually during the seed stage or Series A round.
The investment is typically made in exchange for ownership shares in the company or convertible debt. Convertible debt is a loan that can be converted into equity once the company reaches a specific milestone, such as a subsequent funding round or an event like the sale of the company.
Business angels are crucial to the startup ecosystem because they provide capital, mentoring, and sometimes access to their network to support startups at a critical stage where the companies may still be too early in their development to attract traditional venture capital. The potential upside for a business angel is significant if the startup succeeds, but the risk of failure is also high, as a significant percentage of startups do not succeed.
Business angels often specialize in industries where they have personal experience or expertise, enabling them to contribute more than just financial support to the startups they back. For example, they may mentor the founder or provide strategic advice, adding value beyond the financial investment.