Updated Feb 08, 2022

What is an angel investor?

What is an angel investor?

 

If you're a new company in its early stages, getting capital from an angel investor can be a terrific method to get money without taking on debt. Working with angel investors also provides you access to their expertise and mentorship, which can be invaluable in the early stages of a company's development. Understanding the benefits and drawbacks of seeking finance from angel investors might help you decide whether this is the best option for your company.

 

In this essay, we'll go over what angel investors are, how you discover them, and the primary benefits and drawbacks.

 

 

What are angel investors?

 

An angel investor is a high-net-worth individual who invests in small businesses or entrepreneurs in exchange for stock in the company. They may make a one-time investment or continuing financial support to assist the nascent company in its early stages.

 

Angel investors frequently seek a larger return on their investment than they would get from investing in the stock market. However, their interest in startups is frequently more than purely financial. They might want to work in a certain field, mentor a new generation of entrepreneurs, or apply their talents and expertise differently.

 

 

Types of angel investors

 

Angel investors are typically those who have earned the status of "accredited investor," though this is not needed. Someone with a net worth of one million dollars or more in assets, or who has earned at least $200,000 in the previous two years, is considered an accredited investor. It's important to keep in the notice, though, that an accredited investor isn't always an angel investor. To qualify as an angel investor, you must have a strong desire to fund startups.

 

Angel investors, unlike venture capitalists, typically invest their own money. This sort of investor bridges the gap between seed funding from friends and family and venture capital funding, which may be required for a stronger firm.

 

There are various types of Angel investors, such as:

 

Family and friends:

This is the most common source of startup capital, and it's typically where they begin their search.

 

Wealthy individuals:

Professionals with a high net worth, such as doctors, lawyers, or successful business people, are typically willing to spend a substantial sum of money in exchange for equity in a business, depending on the business.

 

Groups:

Many angel investors are beginning to work as part of a collective. This greatly increases the amount of money that can be invested.

 

Crowdfunding:

This sort of funding is getting more popular. It entails big groups of people investing small sums of money online to achieve a certain financial goal.

 

 

Pros and Cons of angel investors

 

Angel investors have both pros and cons when it comes to funding:

 

Pros of Angel Investors

 

The biggest benefit of getting cash from an angel investor is that it is less risky than taking out a small company loan. Unlike a bank, an angel investor does not require repayment because they obtain equity in exchange for funding. Angel investors are often seasoned investors that have a long-term approach to investing and are aware that they may not see a return on their investment for a long time. In addition to investment opportunities, many angel investors are looking for personal probabilities.

 

Because they have a lot of business experience, angel investors can also help the startup. They have a vested interest in the success of your business and can offer valuable advice and insight. According to research, firms funded by angel investors are more likely to develop significantly, provide a higher rate of return, and stay in business for a longer period.

 

Other Pros of hiring an angel investor for a startup include:

• Credibility as a result of the investor's association
• Contact information for possible clients or employees
• Networking opportunities with investment bankers, accountants, lawyers, and other experts
• Knowledge of the market and strategies utilized by similar businesses

 

 

Cons of angel investors

 

While angel investors make it feasible for entrepreneurs to launch their businesses, there are certain drawbacks to this method of funding, such as the loss of equity. In exchange for capital, many entrepreneurs give away between 10% and 50% of their business.

 

Within the first five to seven years, angel investors might expect a significant return on their investment, perhaps up to ten times their original investment. This might add to your stress and also of your employees. Assess if the business can develop at the rate that an investor would expect before accepting investment, and set growth goals.

 

The lack of control is another negative. Most angel investors take a hands-on approach to the firm after investing their money in a startup. Experiential angel investors, for example, may prefer to have an exit strategy in place, such as bringing a firm public or selling it to a larger corporation. They might try to convince you to sell the company before you're ready. Equally, if you lose too much equity, they may decide to replace you with a more skilled and experienced leader, thereby eliminating you from the company you founded.

 

 

How to figure out if angel investing is a good fit for your company

 

If you're looking for getting an angel investment, here are some things to consider:

 

 

Make a good strategy for your business plan

Before asking an angel investor for finance—or even approaching someone about funding your venture—create a sound business plan. You'll need this whether you're asking for money from a lender or an investment. Angel investors are looking for a well-thought-out and persuasive company strategy. Financial projections, marketing concepts, and specifics about the target market you want to reach are all included.

 

Be specific about the investor's offer.

 

Put in writing what the investor is providing your company in terms of services other than financing, as many angel investors expect to actively participate in the firms in which they invest. This could include participating on the company's board of directors, working as a mentor, or taking an active position as a manager. While your increased involvement, as well as the knowledge and experience you gain, is valuable to the organization, it's always ideal to have expectations written down in advance.

 

Define your roles.

 

It's also crucial to establish a clear understanding of each person's responsibilities, as the angel investor may have their ideas about how to run your company. By establishing duties early on, you can lessen the chances of a later disagreement.

 

 

Conclusion

 

Angel investors play a critical role in the economy's development by providing risk money that fuels economic growth and technological advancements. They are more concerned with the founders' devotion and passion, as well as the wider market prospects that they have discovered.