Angel Investor

An individual who provides capital for a business or start-up in exchange for convertible debt or ownership equity.

An angel investor is known as a wealthy individual who offers cash for a business in return for stock. 

Angel investor

They have invested around $25 billion in 70,000 firms as recently as 2017. Individuals who contribute between $25,000 and $500,000 to assist a firm get started are classified as angel investors. 

Angel funders assist entrepreneurs in getting their company ideas off the ground. According to the Angel Capital Association, these types of investors give up to 90% of outside stock received by businesses.

The word is frequently used in contrast with venture capitalists, who contribute seed funding for similar purposes. Angel funders are often individuals with extra capital and a desire for a greater rate of return.

An angel funder normally expects a return of 25 to 60 percent. Angel was initially used in this context in the early 1900s to refer to businesspeople who provided financial support for Broadway productions.

Knowing Angel Investors

These types of individuals desire to invest in start-up enterprises. Most have surplus assets and want a greater rate of return than standard investment possibilities.

Funding round

They provide better terms than traditional lenders since they typically invest in the entrepreneur's start-up rather than the firm's success.

They are frequently recruited from the business sector, although this is not their only source of funding. They are commonly found in the following professions: 

  • Professionals in business, medicine, accounting, and financial planning.

  • C-suite executives who understand what it takes to run a successful business. 

  • Entrepreneurs and small business owners who have previously developed successful firms.

  • Investors who earn a living by investing in small businesses. 

  • Crowdfunding systems collect money in groups by having each individual pay a modest amount in exchange for a small share of the firm's potential revenues if it is successful.

History

The word "angel" originated in the Broadway theater when wealthy patrons paid money to advance theatrical productions. The term "angel investor" was developed by William Wetzel, founder of the Center for Venture Research at the University of New Hampshire

Wetzel conducted a study on how entrepreneurs raise capital. Centuries before that, there were patrons who gave money to artists and creative individuals so they could focus on creating new works. Angels are the modern-day equivalent of sympathetic financiers.

Meaning

Angel funders are frequently retired, business owners or executives. They may be interested in angel investment for reasons other than monetary gain.

These include wishing to stay up to date on current business advances, coaching the next generation of entrepreneurs, and making use of their knowledge and networks.

Angel groups are typically small, local organizations of 10 to 150 qualified investors. In 2007, there were 258,000 active angel funders in the United States, according to the Center for Venture Research. 

According to literature analyzed by the US Small Business Administration, between 2001 and 2003, between 300,000 and 600,000 individuals in the US made an angel investment. 

Angels began to create informal organizations in the late 1980s with the purpose of sharing deal flow and due diligence work, as well as pooling their capital to make larger investments. 

Angel groups typically comprise 10 to 150 certified investors interested in early-stage financing. There were around ten angel organizations in the United States in 1996. As of 2006, there were over 200.

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Who qualifies as an Angel Investor?

These investors are frequently people who have achieved "accredited investor" status. This is defined by the Securities and Exchange Commission (SEC) as someone with a net worth of $1 million or more.

SEC

However, being an accredited investor is not the same as being an angel funder.

In essence, these people have both the financial means and the willingness to provide startup capital. This is good news for cash-strapped businesses, who find these investors far more appealing than traditional, exploitative sources of capital.

Typically, becoming this type of investor requires achieving the qualifications of an accredited investor as well. 

This implies that your earned income for the last two years must have been $200,000 or more ($300,000 with a spouse), or your net worth, alone or with a spouse, must have exceeded $1 million in investable assets. This value excludes your primary residence. 

As a result, most equity fundraisers seek cash from authorized investors. Many experts feel that accredited angel funders are required. Historically, angel investment options were restricted to accredited investors.

Where do angels get their funds from?

Unlike venture capitalists, who handle money collected from many other investors and deposit it in a strategically managed fund, these investors often utilize their own money.

Though these investors are often people, the entity providing the cash may be a limited liability company (LLC), a corporation, a trust, or an investment fund, among many other options.

Wealthy people, crowdsourcing, and angel syndicates are the most popular sources of angel investments. The investments might reach $500,000 or perhaps more. Such investors can be found through recommendations, local attorneys, and organizations such as the Chamber of Commerce.

Investment

These investors might also form a syndicate to raise prospective contributions for the group fund. The investors may then employ a professional syndicate management team to seek potential investment opportunities in new businesses. 

The team will also be in charge of following up on the investments and having an active management role in the firm to assure the money's security.

Crowdfunding is the most recent source of angel financing. Crowdfunding is a type of internet investment in which a large number of people contribute money to a pool. They might put up as little as $1,000.

The funds are then utilized to support a number of for-profit entrepreneurial companies. In 2015, nearly 2,000 crowdfunding sites raised more than $34 billion globally. These investors will seek both an investment opportunity and a personal one.

They have important business expertise and may desire to play an active position in corporate management. Before taking an angel investment, you should understand what the investor brings to the table in addition to money.

What is the process of becoming an angel investor?

The process of becoming an angel funder is as follows:

1. Check your credentials

Typically, being this type of investor requires achieving the qualifications of an accredited investor. 

This implies that your earned income over the previous two years must have been $200,000 or more ($300,000 with a spouse), or your net worth, alone or with a spouse, must have exceeded $1 million in investable assets.

Credential

2. Why is there a limit?

Angel investments are considered high-risk, and accredited investors are likely to be more financially prepared to withstand a loss if one occurs. As a result, many firms will only take money from authorized investors, but others will allow non-accredited investors.

3. Understand how to find bargains

Many angel funders have a strong network of company founders and entrepreneurs in their respective professions. Because they interact with these people on a regular basis, they frequently learn about new businesses and may come across offers to consider.

When seasoned angel founder decides to support a firm, they may also form and lead an angel syndicate, which is a group of investors that pool their resources to fund a specific project.

If you don't have access to this sort of network, you can approach a startup creator personally if you come across a firm with an intriguing new business concept that you'd want to research and possibly invest in.

Bargaining

Angel Capital Association's member directory may help you find angel investment opportunities. Another option is to join an angel group, which connects you to a network of angel funders. 

Other organizations that display diverse angel investment options are Funding Post, AngelList, MicroVentures, and AngelSoft. When you uncover a good bargain, do your homework before negotiating the size of your capital investment and matching the percentage of company ownership.

The investment portfolio of angel funders

Angel funders that make early-stage investments in businesses that fail lose their whole investment. As a result, experienced angel funders favor companies with a clear exit strategy, such as acquisitions or IPOs (IPOs).

For angel funders, the effective internal rate of return on a successful portfolio is around 22%.

While this may seem enticing to investors, it is too expensive for entrepreneurs with early-stage enterprises, as cheaper funding sources, such as banks, are sometimes unavailable for such businesses. 

Investment portfolio

As a consequence, angel investments are ideal for entrepreneurs who are still experiencing financial difficulties during their business's early period. Because of the pull of profit, angel investment has been a primary source of finance for many entrepreneurs during the previous few decades. 

This, in turn, has stimulated innovation, leading to economic growth. However, half of all angels put no more than 15% of their net worth into seed and beginning businesses.

A typical angel portfolio consists of 10 or more such investments, each of which is worth at least $25,000, with at least 50% retained for future rounds of investment in the same company.

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Where can I find an angel investor?

Approaching angel funders for cash is rare because they are typically rich folks. Begin your search locally, as many angel funders want to be involved in the businesses they support. 

Funding

Some of the most common are as follows: 

  • Angel funders are a broad set of investors of all sizes and kinds. Because they are easier to oversee, most investors will prefer to invest in local start-ups. Finding Angel funders is a straightforward process. 

  • You might begin by looking at The Angel Capital Association (ACA) and AngelList.com. Small firms can also utilize social media to identify potential angel funders. When seeking an angel funder, the best places to start are close to home or on the angel funder's network sites.

  • LinkedIn: Professional social networks like LinkedIn may allow you to interact with an angel funder directly.

LinkedIn

  • Another possible source is successful business people, doctors, attorneys, and others willing to pay up to (typically) $500,000 in exchange for equity. Crowdfunding is a way of raising finances that involves huge groups of people donating as little as $100.

  • Some companies charge a fee to send an online pitch, but most investors prefer that you provide your presentation in 20 minutes or less. AngelList, Angelsoft, MicroVentures, and the Angel Capital Association are online directories of angel funders. 

  • Keep a look out for angel investment conferences in your area where you might be able to meet potential investors.

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Descriptions, firm stage, round size, risks, and rewards for different investors

Angel funders

They are rich (accredited) individuals that invest their own money or combine their money with other Angels in a range of enterprises. In addition, they make early-stage investments in startups (Pre-Seed & Seed).

They will support your concept or MVP even if you have few or no customers. They make smaller investments than growth-stage investors. A Seed or Pre-Seed total round is typically between $1 million and $5 million.

Angel funders will typically spend between $5,000 and $500,000 each investment round. They have more freedom in who and how they invest because they are using their own money. They expect ROI (return on investment) through net earnings/profit or when a company departs via an IPO or M&A.

business plan

Some like a return of 3-5x (some say 5-10x). They provide smaller checks because the investment is their own, but the terms and checks may reach you sooner (sometimes at a critical moment to develop).

Most angels will desire a large stake in your company, a seat on your board, convertible note terms, and/or a discount on your next round.

Venture Investor

Employees of VC funds are known as venture capitalists (VCs), and the people who manage them are called general partners (GPs). Individual investors include affluent family trusts, endowments, corporate pension plans, and sovereign wealth funds.

After raising funds from Angels, you typically seek funding from Venture Capitalists. Some entrepreneurs forego early capital in favor of bootstrapping and family/friends or personal investment.

VCs invest in firms that have a functional product or technology with consumers for future growth. Growth-stage rounds start at $5 million and can reach $100 million, depending on the deal and sector.

Venture Investor

A typical VC Fund investment in a round is $7 million. However, this may vary depending on your round (A, B, C, D+) and industry. They want startups that have significant momentum and are set to grow (fast) in broad markets.

They anticipate that their portfolio firms will leave through M&A or IPO. They also like a 5x-10x return (some say 10x minimum).

They seek growth, you must have both traction and a viable product. VCs write larger cheques and anticipate a better return on investment. 

Because funds have a restricted number of partners and a thesis, decisions will be made with more care, and checks/term sheets may take longer to come.

Private Equity

Private Equity Funds are similar to Venture Capitalists and angel funders in that they do not invest directly in startups. Instead, they make a direct investment in a well-established but not-yet-public firm.

Startup

PEs make investments in a wide range of sectors and verticals. These funds make investments in existing or mature businesses. They come in after venture capital money and frequently when a huge company is failing due to leadership or operations.

An LBO (Leveraged Buyout) is a popular form of arrangement involving private equity firms. An LBO occurs when an investor purchases a majority interest in a firm using both stock and debt. While the firm must return the loan, the investor will develop the business in the meanwhile.

These investors want majority ownership in the firm and issue larger cheques, giving them a vote in critical decisions. If they see it appropriate, private equity funds can fundamentally revamp a company's operations and leadership. They can also profitably sell or purchase a business.

Because PEs enter the market at a later period, their ROI and risk are both lower. This means you have more capital and experience to flip your firm with Private Equity investments.

Advantages and Disadvantages 

Advantages

Having an angel funder implies that your company does not have to repay the cash because you are exchanging ownership shares for the money.

Benefits

When an angel's money is at stake, they may be driven to assist you in succeeding through mentorship or direct managerial assistance.

The following are the pros:

  • There are no responsibilities: Because they haven't requested a new line of credit and most angel investments contain stock transactions, business owners aren't required to repay the angel backer if the company fails.

  • A typical angel funder is also a business owner: Angel funders usually have extensive commercial knowledge and experience. "Financial backers who have created great organizations on their own are very valuable," says Garett Polanco, an accredited angel funder who has sponsored 29 firms.

  • Administrative tasks will be reduced: Organizations that get funding from angels are immune from the onerous investment reports that they would have to file with the Securities and Exchange Commission (SEC) and state regulators if they were to organize an IPO, for example.

  • More money in the future: Angel investment financing is substantially less risky than loan financing. Unlike a loan, invested money does not have to be repaid if the firm fails. Most angel funders understand business and adopt a long-term perspective. The main advantage is that angel funders are frequently seeking personal opportunities.

  • The sky is the limit: The financing requirement for angel investment is often uncapped. It is up to the founder and the angel to reach a deal. As long as angels are prepared to put up the money, there's nothing stopping them from placing further investment tranches in their favorite firms.

  • Angels have a genuine stake in the success of their investments: So they'll want to see your firm thrive almost as much as you do. From this vantage point, you can see this as much more of a collaboration. A victory for you is a victory for the angel.

Disadvantages

In exchange for money, angel funders often require 10% to 50% ownership of your firm. As a result, business owners may lose control of their companies if angel funders believe they are preventing the firm from prospering. 

Cons

Angel funders have a voice in how the company is operated and share in the profits. The following are the cons:

  • There is less control: Companies that engage with angel partners may be required to give up some stock in their firm - but this is usually a small sum.

  • A financial setback: angel funders expect to be compensated for their investments. "That often takes the form of stock, which may be more expensive than debt financing," Lavinsky explains.

  • Possibility for inexperienced investors: You may end up with an unskilled angel funder that provides bad advice or harasses business owners for status updates. This is especially true for new angel funders who put substantial sums of money into a firm.

  • A smaller piece for you: Check that you are satisfied with the angel's share of ownership. The more your firm earns, the more the angel earns, so take a look at different financing rounds out into the future. Consider how huge a slice of that pie you'd like to retain for yourself.

  • Responding to Angels: Some founders find angels frustrating because these investors expect a great deal. They want to be sure they're receiving all the money they've earned. 

  • Angel funders may even set time frames for when they'd like to see a certain amount of profit over the years.

Keep in mind the risks

Because investments or businesses are unproven, angel investing can be hazardous. According to FundersClub, an online startup financing community, 75 to 90 percent of firms fail. While it is possible to profit, many angel funders lose their whole investment.

This is why experienced angel funders usually invest in numerous firms across multiple industries to distribute risk. Because the return on a successful investment is significant, a single win can more than pay the costs of unsuccessful endeavors.

Risk

Angel investing is not a quick method to become rich. It might take seven to ten years or more for a company to expand to the point where investors can make a profitable exit.

It is critical to invest just money that you will not need in the near future but also money that you are not afraid to lose. 

Investing at an early stage is always hazardous. Among the high-level hazards are financing, technical, and market risks.

As angel funders, you must be aware of the primary risks associated with your investment. Understanding the risks allows you to evaluate the company's growth and give human capital support in areas that are critical to the company's long-term success.

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Researched and authored by Manal Fatima | LinkedIn

Edited by Colt DiGiovanni | LinkedIn

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