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Angel investors are professionals who rescue your business in the most profitable ways. Having such an investor by your side means you do not have to repay your funds since you already gave ownership shares in exchange for equity. Going by the name, the investor is an angel who funds early-stage businesses in exchange for equity in an organisation.
Unlike venture capital firms that use investment funds, they use their own worth. The professional not only offers conventional stocks and bonds, but they offer newer ways of diversifying investment portfolios.
Welcome to this post that briefly explains who angel investors are and what their purpose for your business is. Also, learn their roles, types, advantages, and disadvantages to your establishment. This post also elucidates the differences between venture capitalists and angel investors. So, what is an angel investor? Dive into the following details to get a detailed understanding.
What is an Angel Investor?
Angel investors, unlike venture capitalists, use their own net worth. They are wealthy private investors who aim to finance startup business ventures in exchange for equity. With their patience and hard work, they deal with entrepreneurs and offer small dollar amounts for a more extended period of time.
However, they also consider an exit tactic to earn a profit on their own through an acquisition or public offering. Another specialty of these investors is to fund businesses in different industries.
Understanding Angel Investors
If you wish to understand the concept of angel investment, you first need to understand who an angel investor is. Such an investor is a wealthy private investor who focuses on financing small businesses in exchange for equity. The best part of working with an angel investor is they do not use an investment fund like the venture capital firms. Instead, they use their net worth.
Origins of Angel Investors
Angel is a term that originated from Broadway theatre. That was a time when wealthy people gave money to theatrical productions. Angel Investor was initially used by William Wetzel of the University of New Hampshire. Wetzel is the founder of the centre for venture research. Wetzel completed the education about how entrepreneurs can gather capital. That is how the term and purpose of angel investment came into being.
At the initial phase of the startup, business angels act as the bridge between self-funding and sourcing capital. In maximum circumstances, business angels invest in familiar industries. These trends make them an outstanding networking resource for small businesses. Angels remain connected to startup funders, and they refer them to other investors as your business expands.
Who Can Be an Angel Investor?
An individual who has a focus on financial capital and aims to offer the right funding for startups may become an angel investor. Maximum entrepreneurs prefer them for small businesses or startups over any other predatory sources of funding since they are less intrusive.
The purpose of an angel investor is to invest between Rs. 5 lakhs and Rs. 2 crores based on the company’s size.
But did you know?
At different times, they may not prefer investing over 5-10% of the total portfolio amount in one company.
Types of Angel Investors
At times, angel investors in India may wish to acquire an accredited investment status. But if you consider SEBI, an accredited investor might be an individual having a total worth of Rs. 7.5 crores having a liquid worth of Rs. 3.75 crores on individuals with income of Rs. 2 crores. Note that they also have accreditation by a credible agency. Note that not always an angel investor turns out to be an accredited investor. The only requirement one needs to become an angel investor is an interest in offering capital for startups. So, an angel investor can be anyone from your family, wealthy individuals, groups, or even crowdfunding. Let’s discover more in the following points:
● A Family Member or Friend: In startup funding, an angel investor turns out to be the entrepreneur’s friend or family member. It’s a common source of funding for startups and often the first point of consideration for startups regarding funding.
● Groups: Did you know multiple angel investors in India operate as part of one group? It increases their potential for a high amount of investment.
● Wealthy individuals: Based on the business, people have a higher net worth than other individuals. Some of the angel investors examples of wealthy individuals include engineers, successful business individuals, doctors, and more. They invest a significant amount of money in exchange for equity in that business.
● Crowdfunding: The next type is crowdfunding – a sort of funding that is gaining immense traction these days. What it does is allows larger groups of individuals to invest a small amount of money to support the company and assist it in meeting the funding objectives.
Education Qualification of An Angel Investor
An individual does not need any educational qualification to become a company’s angel investor. They come from different backgrounds, such as finance, business, engineering, medicine, and more. Angel investors are highly experienced individuals who have knowledge about business, startups, equity investments, and entrepreneurship. With their understanding of the field, they can take risks and invest their money in a small startup.
Role of an angel investor
The prime purpose of these investors is to offer capital for startups at an early stage in convertible or exchange debt or even equity ownership. Most investors invest their money in companies that work in the same domains where they have experience and expertise. Their prime purpose is to offer strategic inputs and accelerate the ultimate growth. Their role is to be active shareholders in the annual general company meetings and events. In return, they receive considerable equity ownership.
Sources of Funding
As the source of funding is considered, unlike venture capitalists, angel investors use their money. They invest their money in the strategically managed fund. Angel investors in India represent individuals, but the entity offering the fund might be an LLC, investment fund, trust, business, etc.
Startups that fail during an early stage tend to lose investments. That is where an angel investor comes into being. They look for opportunities for an exit strategy, IPOs or initial public offerings, and acquisitions. Considering the internal rate of return for any successful portfolio for the investors is around 22%.
While investors might feel this might be excellent, entrepreneurs may think it to be quite expensive, especially for businesses that are at an early stage. Since inexpensive financing options like banks are not always available for these ventures, angel investments turn out to be a perfect solution for entrepreneurs struggling during the initial stage of business.
Over the last couple of years, angel investing has emerged as a popular concept. It has become a notable funding source for startups these days. And in return, it has also fostered innovations, thereby promoting economic growth.
Advantages and Disadvantages Of Angel Investment For A Business
Narrated below are the benefits and downsides of angel investment for any business:
Advantages of Angel Investors
Presented below are the advantages of angel investments:
1. Connections: Angel investors in India are well-connected in a business as they connect the entrepreneur to new clients, business partners, and funding options.
2. Expert Investors: With angel investment, you can have extensive sectoral knowledge. They may be business owners with expertise and experience in the same industry and provide you with guidance for success.
3. Extended Support: Angel investors must be encouraged by the position to contribute the maximum that they can. In addition, adding their name to the business profile may raise funding.
4. Big bankroll: If the small firm needs more money, it may consult the angel investor for additional contributions. Even when an establishment cannot secure finance from the bank or other financial agency, they may get support from angel investors.
Disadvantages of Angel Investors
So, after explaining the advantages, here’s a list of disadvantages in the below-offered points:
1. Shared Authority: A few angel investors in India may demand a huge ownership stake. So, you may end up selling more than you ever intended to. As a result, it dilutes your ownership and causes hindrances in future business fund-raising.
2. Time and Effort: Always stay prepared for the long and arduous procedure since you must produce paperwork, which includes income statements, cash flow statements, balance sheets, bank statements, and more.
3. Possibly being rejected: Even when you believe that your company has exceptional growth potential or a revolutionary product, funding may carry some risk.
4. Possibly Ineffective: Hiring someone without conducting due diligence may bring financial consequences. So, you need to request references from your investor. It is better to speak to startups with whom they have worked previously for funding. An angel investor must be devoted and hardworking to work with you besides aiming to gain the money back solely. Such a type of professional would lead to success.
Tips for Startups Before Approaching an Angel Investment
Are you a budding entrepreneur who is thinking of hiring an angel investor? Here’s what you must perform:
1. Have a Business Plan
Before you get funds from a professional or hire one, please create a strategic business tactic. Whether you wish to get financing solutions from the lender or investor, a business strategy helps you accomplish success. After all, an effective business strategy would include financial projections, budgeting, strategies for product marketing, and specifically considering the business’s target market.
2. Be Specific About What The Investor Is Offering
Specificity associated with writing the services of the investor will ensure business success. Note that multiple angel investors contribute their expertise and time to startups where they invest. From mentorship to strategic advice, the investor can offer great benefits.
The experience, knowledge, and added involvement provided may be beneficial to the company. However, having your expectations clear from the beginning leads to a transparent relationship between you and your investor, which is the most important consideration.
3. Establish Roles
Developing a comprehensive understanding of the roles is important. Your angel investor might have their ideas for operating the business. Due to this, they might want to have clarity about each individual’s role in the business. So, the next thing you must perform is to establish roles that ultimately mitigate the risks of conflicts at a mature stage of business.
Difference between Angel Investor vs Venture Capitalist
Tabulated below is the difference between angel investors vs venture capital firms:
They are private firms investing capital pooled from other people
They are often the successful individuals who invest their own money
Invests at a later stage, particularly when the establishment has become profitable
They invest at an early stage of the business (more specifically at a pre-revenue or ideation stage)
The investment amount is higher here
The investment amount is lower than venture capitalist
So, you have learned about angel investor meaning, types, roles, advantages, disadvantages, and differences between angel investors and venture capital firms.
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Frequently Asked Questions
Angel investors in India wish to receive 20 to 25% of the business profit. But the amount paid to the investor depends on the initial contract.
A business can discover an angel investor from social media accounts, family, networking events, websites, and other platforms.
The percentage of ownership an angel investor takes in varies from one company to another. However, it remains between 10% and 20%.
The angel investor does not receive any monthly income like employees. But they receive their payment through a return on the investment or ROI either when a company they invest in is acquired or goes public. This particular return might be structured in the form of a one-time payout or via a set of payments done over time.
Yes, an angel investor can exit. The exit is when the investor sells the equity in any investment. The prime purpose of an exit is to recoup its initial investment. Maximum investors wish to get a return of a minimum of 20 to 25% on the initial investment.
Yes, angel investment is a profitable venture. Among all the benefits, one of the excellent ones is the potential for higher returns. In short, angel investors get a percentage of ownership in companies they choose to invest in. It contributes to a significant ROI or return on investment only when the company becomes successful.