An angel investor is someone who supplies capital to new businesses in return for ownership equity. Angel investors supply capital to companies for financing their business start-ups. Angel investing was not popular until very recently and a lot of people seemed to have embraced this method of investment because according to a recent research, the number of angel investors in the United Kingdom alone was put at over 18,000.
The difference between an angel investor and a venture capitalist
A venture capitalist pools resources from different investors and then invests this money on their behalf. An angel investor on the other hand takes control of his funds and decides how and where he wants to invest his money. He invests his money in brilliant start-ups with prospects in exchange for equity or preferred shares in the business.
Why angel investing became popular
The traditional way to get business funding is to approach the bank or other financial institutions but unfortunately, most financial institutions are quick to turn down new start-ups because they feel that the business may not be viable and they may end up losing their money. So, when people with start-up ideas get turned down, they resort to raising capital through angel investors. Angel investors unlike banks and financial institutions are more open to funding new businesses.
An angel investor not only invests his money in a business; he would also bring in some experience, knowledge and skills to help the business grow and succeed.
How do Angel investors get rewarded?
Usually, angel investors demand a high return on investment because of the high risks involved. Sometimes, an angel investor would demand for ten times his invested capital as compensation for risks taken and in the event that the business fails, there is usually a defined exit strategy to help the angel investor recoup his investments.
3 Categories of Angel Investors
Angel investors fall into three main categories-:
- Core Angels-: These are individuals who are successful and experienced business owners themselves. In addition to supporting the start-up with capital, they also offer advice and support that would help the business to succeed.
- High-Tech Angels-: This type of investor is mainly interested in bringing new technologies and gadgets into existence and would usually fund start-ups that have to do with modern technology improvement.
- Return on investment Angel-: Here is an investor that is mainly in it for financial rewards. Such investors have a diversified portfolio of businesses which they invest in and make money from annually.
8 Types of Angel Investors
We have already discussed the categories of angel investors; now let’s talk about the different type of angel investors:
- Corporate Angels-: This kind of investors would usually invest for equity and a chance to occupy a paid position in the company.
- Entrepreneurial Angels-: An entrepreneurial angel has steady, sufficient flow of income which he can afford to invest a part of for profit and also enjoys helping entrepreneurs start their businesses.
- Enthusiast Angels-: These are wealthy, retired individuals who see investing as a hobby and would usually invest small amounts in several startups.
- Micromanagement Angels-: This kind of investor brings both funds and management skills and experience into the business.
- Professional Angels-: Professional angels are professionals who invest in businesses in their field and also offer discounted services.
- Mentor Angel-: Just as the name implies, this kind of investor doesn’t invest money but mentors the entrepreneur and offers advice which would help the business succeed.
- Head Angel-: This investor brings together a team of other angel investors to invest in a start-up.
- Dark Angels-: This kind of investor invests with a motive to take over the business from the owner.
How to Become an Angel Investor
First, you have to have enough money and become an accredited investor. Then you need to know how to analyze proposals and business plans to determine which businesses are worth investing in and which ones to avoid. Before you invest in any business, here are the basic things you have to consider-:
7 Factors to Consider Before Investing in a Startup Company
a. Stakeholders-: The profile, experience, skills and credibility of the entrepreneur and every other person that would be involved in planning and managing the business should be considered.
b. The business potential-: Another thing to consider is the viability of the business idea being proposed. You have to consider all parameters to be sure that the business stands a chance to succeed if you invest in it.
c. Internal and External factors-: There are a lot of things that determine whether a business would be successful or not. For instance, demand and supply, government policies, industry trends, inflation and technological have a lot of impact on the success of any business.
d. Benefits-: You also have to consider what is in it for you. You should ensure that all the terms and conditions are spelt out and favorable for you.
e. Management-: Sometimes, the entrepreneur would be different from the people who would manage the business. In this case, you have to know who the managers would be and whether or not, they have the qualification and experience to successfully manage the business.
f. Revenue path-: How does the company propose to earn money and make profits from the business?
g. Exit strategy-: Should the business fail, how would you recover your funds?
8 Questions to Ask Entrepreneurs Before You Invest your Funds
1. First, you should ask for an introduction of the entrepreneur(s): Who they are? What qualifications and experience they have and all other background information to help form an opinion on the credibility and experience of the owners.
2. Ask questions about the major competitors and the challenges the product or services propose to fix or the gap it is designed to fill.
3. Targeted customers and how to reach them.
4. Marketing and promotion strategy for the products or services.
5. Amount of fund needed and how it would be utilized.
6. Period of investment and payment strategy.
7. Investors return on investment rates.
8. Exit strategy in the event that the business fails.
Angel investing can be a very lucrative albeit risky business and to minimize risks, it is advisable to invest small amounts in several businesses rather than investing a lump sum in a single start-up.