What is an angel investor
Angel investors provide capital to entrepreneurs and small businesses in exchange for equity in the company. A one-time investment or ongoing financial support may be provided in the early years to help the new company succeed.
As kids, when we were disappointed by not getting something, we always hoped for an angel to show up and grant our wishes and turn our fantasies into reality. Same is the case with Angel Investors, they come to help at the time we need them the most.
Compared to investing in the stock market, angel investors generally seek a higher rate of return on their capital. They are often interested in startups beyond monetary return, however. Those with entrepreneurial skills and experience may be interested in working in specific industries, mentor a new generation of entrepreneurs, or utilize their skills in a different way.
Angel investors are motivated by a variety of reasons, including a particular area of interest, a belief in a product, and personal reasons. Investing in accessible technologies could be an important motivation for someone with a disabled child.
This meaning of angel originated in the early 1900s, when prominent businessmen backed Broadway shows. The businessman was also motivated by the potential financial gains associated with a successful show as well as the prestige associated with being involved in an artistic endeavor. Wetzel studied how entrepreneurs raised seed capital at the University of New Hampshire in 1978, which is when the term first became widely used in this sense.
Types of angel investors
The majority are accredited investors, although this does not always need to be the case. Accredited investors are individuals with at least one million dollars or 200,000 in income over the past two years or those with a net worth of one million dollars or more. Regardless of whether someone is an accredited investor or an angel investor, it is essential to understand the difference. They must be passionate about providing capital for startups in order to become angel investors.
In contrast to venture capitalists, angel investors usually invest their own funds. Venture capital is a form of financing that bridges the gap between seed funding provided by friends and family and venture capital funding, which may be necessary for a more robust startup.
What Angel Investors Want to See
While angels may make the difference between a startup’s growth or closure, they are, first and foremost, investors. They are not interested in giving their money away – they do want it back at some point. To improve their odds of getting their investment back, with appreciation, angels often consider the following when evaluating businesses:
- Experience or track record of founders
- Viability of business plan
- An innovative or disruptive product or service
- Whether the business is scalable
- Existing revenue
- An exit strategy
When making a pitch to an angel, keep these points in mind.
Angel investor is a somewhat general term, and you can find this type of investor in many different forms, including the following:
- Friends and family: This is the most common source of funding for startups and is usually where startups begin when looking for financing.
- Wealthy individuals: Depending on the business, people who have a high net worth, such as doctors, lawyers or successful business people, are often willing to invest a large sum of money in exchange for equity in a business.
- Groups: Many angel investors are increasingly starting to operate as part of a group. This raises the potential for the level of investment significantly.
- Crowdfunding: This type of funding is becoming increasingly common. It involves having large groups of people invest small amounts of money online to reach a specific financial goal.
Advantages of angel investors
A business loan from a bank carries a greater risk than a small business loan from an angel investor. An angel investor gives equity instead of a loan in exchange for financing, so you don’t have to repay them. Investors who invest through angels are typically experienced investors who take a long-term view and understand it will take time before they see a return on their investments. In addition to investing, angel investors are often looking for personal growth opportunities as well.
Additionally, angel investors offer mentorship to startups due to their extensive business experience. You can gain invaluable insight and advice from them since they are motivated to see your business succeed. A study conducted by the National Angel Network shows that startups backed by angel investors experience greater growth, a significant rate of return, and remain successful for long periods of time.
Other benefits that a startup gets by taking on an angel investor include:
- Credibility from being associated with the investor
- Contacts for potential customers or employees
- Contacts with investment bankers, accountants, lawyers and other professionals
- Marketplace knowledge and strategies used in similar companies
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