An angel investor is a wealthy individual who provides the initial capital investment for a startup. They are business angels or seed investors as they provide the investment during the early/initial stages of a startup.
Angel investors provide said capital against some insurance of their investment. This is usually in the form of a certain percentage of stake in the company. They also typically have an exit strategy in mind, often, by means of acquisition or Initial Public Offering (IPO).
The amount of investment offered by an angel investor depends on their net worth as well as their desire to invest in a particular venture. These are high risk investments and investors may be cautious about the amount they are willing to invest.
Angel investors, apart from wealthy individuals, are oftentimes family members or friends who come forward because of their familiarity. They can also be part of a group in which case, the funding amount could be higher. Finally, with the proliferation of social media, crowdfunding has also become a major source of angel investments.
What is the Significance of an Angel Investor?
Provide advice and knowledge – Angel investors are usually highly experienced in business matters. They are industry experts who have significant experience and expertise. This puts them in a position to not only provide funds, but also valuable advice to the company they invest in which, in turn, may help the startup perform better.
Providing risk capital – Angel investors are important as they undertake high risk investments. Providing seed funding is risky as the business is new and there is no guarantee as to the success of the venture. Lending funds at this vulnerable stage makes angel investors extremely important in the startup world.
Lower rates of interest – The funding provided by angel Investors is at a relatively lower rate than those provided by others, such as venture capital funds. This proves helpful to the startup as it brings costs down and frees more funds for the development/innovation of the business itself.
Lower risk to startups – Startups don’t have to pay back angel investors their seed money as they usually receive equity as their payment. This means lower risk for the startup in comparison to taking out a business loan where the loan would have to be repaid with interest.
Benefits of an Angel Investor
- Easier access to funding than other avenues, such as venture capital and borrowing from banks
- Advantage of the angel’s expertise
- Reduces the need for collateral for credit
- Ensuring discipline die to outside scrutiny
Drawbacks of Angel Investors
- Not suitable for businesses requiring very large investments
- Have to part with a certain percentage of the company
- Risk of external interference and lack of autonomy
- Could be time-consuming to find a suitable investor
Things to Keep in Mind While Searching For an Angels
Have a plan – You should have a clear business development model before searching for investors. Angels, or any investor for that matter, wants to know your vision about your business. It’s only when they find that you have a comprehensive business strategy do they decide to part with their hard-earned money.
Clarity about the offer – There should be no confusion regarding the terms of agreement. Angel investors, typically, lend in exchange for a share of the company, ranging from 10-50 percent. The terms of lending should be well-defined and properly drafted to avoid disagreements later.
Defining roles – It’s very important for the establishment of boundaries with the proper definition of the roles the investor plays. As most angel investors have prior experience and high stakes in the investment, they may want to operate a certain way. Due diligence must be taken to ensure there are no clashes between the parties involved.
Angel investors are a boon for the startup culture as they provide more flexibility with regards to the funding process. There are also advantages that come with the investor in terms of experience, as well as contacts and credibility from association with a successful investor.
Although there are a few disadvantages which may come in the form of ego clashes with respect to the workflow and work plan, angel investors remain important as they breathe life into startups driving technological innovations and economic development.