What is an Angel Investor?
An angel investor is an individual that invests in a new or small business venture by providing capital for start-up or expansion. These investors have spare cash available and look for a higher rate of return than they would get from more traditional investments. They typically expect a 25% or more return.
Angel Investors fill the gap between the small-scale financing provided by the family and friends and the venture capitalists.
Angel investment is a type of equity financing in which the investors provide funding in exchange for an equity position in the company. Equity financing is used by businesses that aren’t established and don’t have sufficient cash or collateral with which they can secure business loans from financial institutions.
The most well known example of angel investors are The Dragon’s Den and The Shark Tank.
Advantages and Disadvantages of Angel Investors for the Business Owners
Advantages
- The main advantage of angel investment is that financing from it is much less risky than debt financing.
- Unlike a loan, invested capital doesn’t have to be returned in case of business failure.
- Most of the angel investors understand business and they take a long-term view.
- Angel investors often look for a personal opportunity and an investment.
- Angel investors typically will bring more to the table than just cash.
Disadvantages
- The main disadvantage of using angel investors is having to give up equity.
- The angel investor has a say in how the business will run and receives a part of the profits when the business is sold.
Equity is key! This can’t be stressed enough. Giving up equity is like giving up your kidney!
Typical Sources of Angel Investors
Family and Friends: make up the most common source of funding for business startups. It can, however, be risky due to the possible impact on the relationship with friends and family in case the business isn’t successful. Therefore, it is important to be upfront regarding the risk of failure.
Wealthy individuals: Successful business individuals, doctors, lawyers, and others that have a high net worth are good sources. They are willing to invest around $500,000 in return for equity.
Groups: The investors contribute funds to a group of angel investors and a professional management team from the groups chooses the investments. Crowdfunding: It is an online investing group in which funds are raised by having large groups of individuals invest small amounts like $1000.
Communicate Before Deciding
For any business individual, it is important to think about what expertise besides the money the angel investor is bringing to the deal while choosing an angel investor. It is also important to develop an understanding regarding what the angel investor would like to work with since there can be conflicting ideas of how the business should be operated. There should be a comprehensive business plan in place since small business needs it to secure financing from lenders or investors.
