Angel investors not only provide capital for emerging companies, but they also become involved in a business that could have excellent long-term growth potential.
Angel investors may or may not be accredited players of the financial markets, although such a term typically refers to high-earning and high-net-worth investors. Many of them are even entrepreneurs who are interested in exploring new industry developments.
Angel Investors Explained
Angel investors are a type of investors who provide new, early-stage business ventures with financial backing in exchange for a portion, which can be equity or royalties, of the company.
Such investors can either be accredited or non-accredited, and they are often wealthy individuals, foundations, or corporations, to name a few.
Identifying Angel Investors
Many angel investors are high net worth individuals from the corporate world, although you can find such investors in other fields like legal, medicine, and finance.
C-level executives, with ‘c’ meaning ‘chief, can work as angel investors for developing ventures, as they’re well-versed in establishing and managing an excellent business.
Additionally, you can find such investors within the group of thriving small entrepreneurs and business owners because they can have a good eye for identifying promising startups.
Angel investors can also be investors who make it a professional hobby to provide financial backing to young ventures.
Crowdfunding platforms are considered angel investors as well. They collect small amounts of money from a huge group of investors to finance a startup or project. In exchange, investors who participated in crowdfunding will have a small share of the profit, provided the venture turns out profitable.
Angel Investors and Venture Capitalists
Angel investors and venture capital provide financial support to companies to acquire a share of the business, but that’s where the similarities between these two end.
While both focus on startups, the stages in the business’s development where they participate and offer capital are not the same.
Angel investors could invest in the business when it’s only an idea, while most venture capitalists prefer to have a proof of concept (POC) before investing.
Angel investors’ financial source is also different from what venture capitalists use. Angel investors source funds from their own pockets, while venture capitals source theirs from managers who make investments with their own and other people’s money.
In addition, angel investors tend to be more hands-off with the business than venture capitalists, who often receive board membership and can have a say in the company’s operations.
Angel investors invest smaller amounts than venture capitalists as well. Where angel investors put between $10,000 and $100,000 into the company, venture capitalists put as much as $2 million or more.
The Work of Angel Investors
Angel investors usually aim to put money into budding companies at the seed or angel funding stage. That means they invest when the venture or project is only an idea or when it’s already existing and operating.
Angel investors can sometimes appear after the first funding round, which typically involves the company’s founders themselves, banks, or the founders’ family and friends. A seed funding is often a small figure that brings a firm’s value between $3 million and $6 million.
Angel investors participate once there’s initial funding but before the business seeks a more considerable investment from a venture capital group.
That’s because their goal is to increase their money during the crucial, preferably early, point of growth after the original funding seems about to be exhausted and before venture capital companies make a move to team up with a well-performing startup.
Angel investors provide financial backing of varying amounts, although they typically don’t invest over 25% in the business venture.
That’s because seasoned angel investors understand that the founders should own the biggest piece of their own companies, so they have the most reason to make the business successful.
Some angel investors invest around $5,000, while others put as much as $150,000 into the developing firm. Angel investors can also work together to make a million-dollar contribution to certain companies.
The Angel Investing Process
Angel investors are introduced to new, emerging firms through several ways: word of mouth, their business connections, industry conventions or seminars, and referrals.
If the angel investor and the company find common ground, the angel investor will gather the necessary information about the new business. That can be done by talking directly to the founders, going through the firm’s investment files, and analyzing the industry the company is focusing on.
Once the angel investor and the company established a verbal agreement, a term sheet or non-binding contract will be created, which will cover:
- Agreed terms of the investment
- Ownership equity percentage
- Investor rights and protection
- Authority limitations
- Angel investor’s exit strategy
An official deal is made and sealed once the contract is completed. The agreement will be concluded, and the investment dollars will be used on the emerging firm’s operations and ventures.
The Perks of Having Angel Investors
Angel investors are usually individuals with an excellent understanding of the business field. They are accomplished entrepreneurs who have built and run established companies on their own.
Zero Financial Responsibilities
Company founders are not obliged to repay angel investors if the business fails because they don’t have a new line of credit. Moreover, many angel investing deals typically involve an ownership stake.
Potential for Further Funding
Many angel investors have long-term horizons. So when they invest in a company, they could consider making another contribution in the long run.
Cons of Seeking Assistance from Angel Investors
Lack of Experience
One of the biggest disadvantages of using angel investors is finding yourself with a complete beginner who offers advice and suggestions that could hurt the business or constantly pursues the owners for updates.
Not Much Control
Working with angel investors often means the company will need to provide them with a certain amount of equity in the business. The ownership shares are usually small, but angel investors might seek a more significant position in the company.
Negative Financial Impact
Angel investors fund startups in exchange for an ownership stake that can cost more than debt financing.