Angel investing has occupied headlines because it has jumpstarted some of the most innovative brands known today. Who are these angel investors, and how do they function?
What is an angel investor?
An angel investor is someone who provides financial capital to startup businesses. This type of investor is usually after a higher rate of return compared to traditional investments. On the average, an angel investor looks for a 25% or more return of their investment.
While this arrangement may be a tad steep for a startup business to share with its investors, it’s still a cheaper source of financing than banks, who are lukewarm to funding new companies. This makes angel investments highly suited for businesses that are not yet financially stable.
Form of equity financing
Angel investing is also a form of equity financing because the investor/s typically takes an equity position in the business in exchange for the invested capital. Startup-up companies usually use equity financing because they do not have enough capital or assets to secure loans from financial institutions.
Who are they?
You can consider angel investors as people who fill the gap between small-scale entrepreneurs and venture capitalists. They are also referred to as private investors, informal investors, angel funders, seed investors, or business angels.
Angel investors provide more favorable terms to startups than other lenders since they are investing in the entrepreneur rather than on the business’ viability. Usually, angel investors are accredited investors, but they are not purely for millionaires. They can also be individuals who have excess money and want to invest their money either for profit or philanthropy.
Examples of Angel Investors
Unlike venture capitalists and financial institutions, many angel investors do not invest solely for profit. Some are willing to accept the risk and demand little or no control in the business as a return of their investment.
Angel investments may be sourced out from family and friends. This is the most common source of angel investment because an established relationship already exists. Nevertheless, managing it could be tricky. It’s essential to be upfront with them due to the risks involved. Any conflict or confusion might cost your relationship when the business fails.
Another source of angel investment constitutes affluent individuals. They are the business people, middle managers, doctors, accountants, lawyers, brokers, and others who have a high net worth and raring to invest. This type of has discretionary income available for such investment. Due to the high risk involved in startup businesses, this type of investor usually seeks a defined exit strategy, initial public offerings, or acquisitions.
Angel Investor Groups
Groups of angel investors are also an option. They are angel investors who have formed a syndicate or group to raise their potential level of investment.
Intermediaries can also be considered for angel investments.Usually called “boutique investment bankers,” these are firms that will seek angels for startup businesses. They are firms that focus on finding small financial deals. What they do is charge a small percentage for the amount they raise for you.
Lastly, the most recent form of angel investing today is crowdfunding. This involves online sourcing of funds to multiple individuals who are interested in your business.
Advantages of Angel Investment
- Less risk than debt financing. Unlike business loans, the injected capital in angel investment need not be returned in the event of business failure. It also does not need collateral.
- Valuable knowledge from Angels. Since angel investors are highly knowledgeable in business, you can capitalize on their advice and guidance. Also, they can mentor you and hone your management skills.
- Additional business network. Through your angels, you might be able to access their business connections for future needs.
- Better fiscal discipline. Since angels are part owners already, they can scrutinize the fiscal status of your business.
Disadvantages of Angel Investment
- Risk of complete loss of control. Because angels typically demand equity, business failure will lead to a loss of significant business control.
- Shared management. You lose the sole right in directing the business as this is shared with your angels.
- Shared profit. Angels will have their fair share of the profits of your business.
Angel investing has significantly grown over the past decades. It has become a primary source of funding for many startup businesses. The desire of angel investors to provide funds for startups has made angel investment more appealing than other predatory funding options. Still, loss of control and shared management are some of the drawbacks to the advantages of securing angel investments.