Angel Investors: Overview, Advantages, Disadvantages, And Who are they?

Overview

An angel investor is typically a person who likes to invest in startups for expansion or seed money. They have the viable source of cash available and look on to take higher risks to generate a higher rate of returns.

They want returns on the north of 20 percent at the minimum due to the risk they are taking. Angel investors primarily invest through equity. The supply of equity is made by the founder of the company.

This is because startups that are not yet established do not have good cash flows and collateral to secure funding from financial institutions.

They are therefore called angels as they bridge the gap of need. Attracting angel investors can however become tricky.

Angel investors make the investment in the early stage of the businesses. The investment of angel investors is typically diversified as they invest in risky prospects with high potential.

Angel investors are always looking for investments that can generate a higher rate of return than traditional investment opportunities.

These investors are also popularly called informal investors or seed investors in the business world. They inject capital in the seed stage of business.

Who Can Be an Angel Investor?

Angel investors are individuals with famous tags. They are typically the individuals who have started businesses in the past and exited them generating huge wealth. Some investors also seem to have enormous family wealth.

As per SEC, angel investors have accredited investors who need to have a net worth on the north of $1 million in assets or more. Generally speaking, angel investors have the stomach for the risk in the new business landscape.

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Advantages and Disadvantages of Angel Investors

The main advantage is the form of angel investment. The investment is in the form of equity and not debt. That means small startups or businesses would not need to service debt in this form of investment.

Further, in the case of failure of a business, the founders need not need to repay the investment like loans. Another advantage would be the kind of expertise angel investors bring in.

They not only come in with bags of money but also with the knowledge of business. They are typically knowledgeable folks in the industry and act as advisor these early stage startups.

These angel investors typically have knowledge in technology fields and may come with perks of their own team to scale up the existing business.

The major disadvantage would be the founders losing the complete ownership of the company.

The angel investors would now have say on the daily affairs of the business like the founders of the business. They would be sharing the profits when the business is sold. This is also different to debt.

In the case of debt from the financial institutions, the ownership is not forfeited by the company.

Typical Sources of Angel Investors

Most of the angel investors are of following:

Wealthy individuals: These are professional angel investors so called accredited investors with knowledge of the industry. Their source comes from their own wealth or from their heritage.

Family and friends: This is common type of funding in the early stage startups. It’s tricky to have family and friends.

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The kind of emotional wreckage it can cause in relations in the event of failure is highly devastating and cannot be calculated. Therefore, one should be transparent as much as possible.

Groups: Investors also pool their money and form group of angels. In this scenario, group of angel investors extend their investment through diversification and sharing the risk. This immediately minimize the risk of angels.

Crowdfunding: This is latest trend where individuals offer some sort of stake or products in lieu of funds. This is done through online sites specialized in crowdfunding.

Finding Angel Investor Groups

We have already dealt with sources of funding for angel investments. The professional angel investors are highly sought after for their expertise and background.

They are available with presence and strong media presence. Multiple techniques can be used to find angel investors as:

  • Through local coworking spaces and accelerators
  • Attending pitch night events’
  • Local such as Meetup events
  • Personal introductions
  • Angel investor associations
  • Through networking

What angel do investors look for investing in a business?

Every angel investor has their own mechanism to test the waters in the early businesses. However, the following items are looked at thoroughly before checks are signed by the angels:

  • The quality, integrity and commitment of the founders.
  • Technology used by the company and if it’s unique
  • The market the business is trying to cater to and scope to scale the business.
  • The valuation sought by the founders and if it’s reasonable.
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