Angel investors are an essential component of the startup ecosystem because they often come in when nobody else is ready to take the risk of funding an entrepreneur. In my more than 18 years as an entrepreneur, I have met many different “angels,” including corporate executives, wealthy families, and prosperous first-generation business owners.
I have seen three different types of angels, beginning with the kind that wants to be acknowledged and would spend $20–50k on any opportunity they see fit before praying. These angels only want to observe the scene, with the true return on their investment being invitations to speak at start-up conferences and being recognised as “prolific investors” in start-ups.
The sophisticated ones are those having the resources ($300k and more) to develop a concept into a functioning product as well as the contacts necessary to facilitate client relationships. They have sufficient expertise and success to be able to remain useful throughout the start-up process and to build sufficient leverage with subsequent investors to enable their departure when the time is right.
The “strategic” investors are those who make investments with the intent to eventually take ownership of the company, hire family members to manage it, or force a merger with another company they already control. Which ones should you avoid? the tactical one!
What is an angel investor?
Typically, angel investors have earned more than $200,000 over the previous two years, making them accredited investors. Couples filing jointly must earn at least $30,000 per year in income. In any case, the accredited investor must have a net worth of at least $1 million.
Angel investors often fund businesses in their local community, region, or sector. They have the option of investing alone or as a group of angel investors. Angel investors often have deeper motivations than just investing in the next great thing.
Adam Burrows, co-founder and managing partner of Range Ventures, said: “Angel investors want to invest in something they have a passion for.” It may be a hobby, a nearby company, or a sector of business that they are enthusiastic about.
What distinguishes an angel investor from a venture capitalist?
Both venture capitalists and angel investors look for fledgling firms to invest in, but there are some significant differences between the two investment groups.
Start with the point at which they make investments. Business founders generally seek out angel investors after using all of their available family and friend funds. It’s known as seed money at this point and often amounts to tens or hundreds of thousands rather than millions. Established startups are funded by venture investors. You only see million- or even billion-dollar values when VCs are involved.
Angel investors and venture capitalists have diverse demographics. VCs often work for a company or fund and invest in businesses using the money of other people. Angel investors are people or organisations that make investments using their own money. Although both desire to coach and develop the businesses they invest in and want an ownership part in exchange, an angel investor may have more flexible conditions.
Compared to a VC, angel investors are also more at ease playing a smaller role in a firm. VCs sometimes ask for one or two seats on the boards of the firms they invest in because they want to have a direct hand in the expansion of the business.
Both venture capitalists and angel investors want a profit from their investments, while the latter group’s choice is motivated by emotion. VCs seek for rapidly expanding firms that have the potential to disrupt an industry. Angel investors seek for businesses that have personal significance for them.
How does angel investing work?
Angel investors may finance their investments on their own, via a fund where everyone in the group contributes money, or through a network exchanging information and investment ideas. The financing organisation chooses which businesses to invest in and how much in the latter scenario. The angels may choose their own investments thanks to a network.
What are the main financing sources for angel investors?
In contrast to other investment organisations, angel investors stake their own cash on the businesses they believe have promise. Their primary distinction from venture capitalists, who solicit funds from outside investors to start a fund, is this.
Angel investors take money out of their personal bank accounts, which is riskier, to support a firm. Nobody but the outside investors loses money when a VC makes a poor gamble.
The purpose of angel investing
Although they care about the businesses they back, angel investors aren’t always fully selfless. They want to see a return on their investment as well.
According to Gouhin, “the only way angel investors get compensated is if there is an exit.” Entrepreneurs often ask themselves, “How far can you carry it, and who is going to purchase it?”
One avenue for angel investors to recoup their investment is via an initial public offering, but according to Gouhin, just 2% to 3% of businesses end up becoming publicly listed companies. The likelihood of the company being bought is higher.
According to Gouhin, “for the majority, the departure is via a purchase from a bigger corporation.” “Where innovators and angel investors see a return on their investment”
What percentage of the company do angel investors want?
Angel financiers are not avaricious. They want a piece of the firm in return for their investment, but they also don’t want to hurt the business they are supporting. Too much dilution might undermine their attempts to enable the founder and management team to attract new employees. According to Gouhin, angel investors like a 20% to 30% ownership.
What benefits and drawbacks do angel investors have?
The development of tomorrow’s major corporations depends in large part on angel investors, yet not everyone is a good fit for this kind of investment. Working with angel investors has advantages and disadvantages, just like everything else in life.
Pros of working with angel investors
In comparison to alternative fundraising options, getting money from an angel investor provides a number of benefits. The main one is that since angel investors are risk-takers, they are more likely to make investments.
Businesses must fulfil requirements before applying for funding from banks, lenders, and venture capitalists. Just as VCs won’t collaborate with you till you have clients and revenue, they won’t offer you money just on a concept.
Angel investors take calculated risks. They are ready and eager to spend the money. They are not subject to the firm’s upper management or the underwriting standards. There is nothing preventing them from investing in you if they like you and your company concept.
Utilizing angel investors to finance your company also reduces your risk. An angel investor is placing a wager on you when they invest in you. If things don’t work out, they don’t expect you to pay them back. With banks and lenders, such is not the case.
The coaching and guidance you get while working with an angel investor is quite advantageous in addition to the financial assistance. Numerous angel investors are a gold mine of knowledge since they have “been there, done that.” They are willing to put in the extra effort necessary to ensure your success.
According to Mike Lebus, the creator of Angel Investment Network, “Angel investors often provide their experience, knowledge, and connections to assist propel the firm ahead and help boost its chances of success, which is clearly in everyone’s interest.”
Cons of working with an angel investor
Working with any investor, even an angel investor, has its share of drawbacks since it requires some control surrender, which may be challenging for entrepreneurs. Typically, angel investors want at least a 20% ownership part in your company. You now have someone else to answer to since you accepted the investment in return for stock.
“Whenever you obtain equity money, whether from family and friends, angel investors, or venture capital companies, you now clearly have shareholders, which adds additional duties, administrative burdens, and pressure,” Lebus said.
Lebus advised deciding in advance how active the investors would be in your company if you are hesitant to cede control but need the funding. From the start, everyone should be in agreement.
Before a company has many clients or revenues, angel investors invest in them in their early stages. The investment is often lower than it would be with venture capital as a consequence. Typically, angel investors provide around $250,000 to a company’s funding. A venture investor may readily raise millions of dollars for later-stage firms.
According to Lebus, “we typically encourage firms to secure enough capital to allow them a 12- to 18-month runway.” Fundraising may take a lot of time, therefore entrepreneurs shouldn’t do it too often since they already have a firm to operate.
Like venture capitalists, angel investors are picky about the businesses they back. According to Gouhin, angel investors prefer to avoid mom-and-pop shops and family-run enterprises in addition to being regionally or locally oriented. According to him, angel investors often invest in the following sectors: biotech, e-commerce, fintech, green tech, and healthcare technology.
How to locate angel investors for your company
Angel investors are everywhere, but if this is your first time around, it may seem like looking for a needle in a haystack. Here are some methods for locating angel investors:
Peruse networks of angel investors.
These networks are a well-liked method of introducing your company to angel investors. Over 200 angel network clubs exist nationwide, according to the Angel Capital Association. These teams listen to proposals from entrepreneurs and exchange knowledge.
Another tool for finding investors is the Angel Investment Network. On the website, you may post your company pitch and look for angel investors. Gouhin advises beginning with the networks in your neighbourhood and expanding from there.
Keep expanding until you locate the appropriate audience and the appropriate period of time, he said.
Utilize your own network.
Your personal and professional network is one of the fastest and simplest ways to generate money, according to Burrows. Your contacts are more inclined to listen to you since they already know you and your company.
Reach out to them to determine their interest in your service or investment, learn what they know about possible investors, and ask them to recommend you and your company. You might use an introduction or a cold call on LinkedIn to get in touch with company leaders in your specialty if your sector is unique.
Get ready
When reaching out to investors, be ready to pitch your tale. Make a PowerPoint show with your financial forecasts, an elevator pitch, and potential for development. It’s also crucial to have knowledgeable and experienced consultants on your team. Burrows advised hiring them as mentors or giving them stock. Your prospects of obtaining money will increase as you and your team gain investors’ confidence.
Burrows said that persistence is ultimately the secret to obtaining cash.
“Fundraising is challenging. No matter whether you’re attempting to raise $10,000 or $10 million, the game is one of numbers. You must speak with several investors. Rejection must not be personal. Despite knowing that it would be challenging, pursue your goals nevertheless.
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