An angel investing is providing a financial support from a high-net-worth individual for startups or entrepreneurs in return for ownership stake. Angel investors provide up to 90% of outside capital received by startups, excluding friends and family, according to the Angel Capital Association, the world’s largest angel investor network. Entrepreneurs rely on the assistance of angel investors to launch their company concepts.
The money provided by angel investors may be a one-time investment to assist a firm get off the ground, or it may be a continuous infusion to support and sustain the business through its challenging early phases.
What does angel investor mean?
Angel investors are individuals who aim to invest in firms in their earliest phases. These investments are risky and typically do not exceed 10 percent of an angel investor’s portfolio. The majority of angel investors have surplus capital and want a greater rate of return than that offered by conventional investment possibilities.
Angel investors offer better terms than traditional lenders because they are more interested in the entrepreneur than in the business itself.
That means, they are more concerned with assisting businesses in taking their first steps than with any potential profit they may make from the firm. Angel investors are essentially the opposite of venture capitalists.
How the term “angel investor” was created?
They are also referred to as informal investors, angel funders, private investors, seed investors, or business angels. These are often wealthy individuals who invest funds in exchange for ownership stock or convertible debt. Some angel investors invest via online crowdfunding platforms or create angel investor networks in order to pool cash.
The term “angel” originated in the Broadway theater, when affluent individuals funded theatrical shows. William Wetzel, founder of the Center for Venture Research at the University of New Hampshire, was the first to use the phrase “angel investor.” Wetzel conducted research on how entrepreneurs obtain funding.
Who can be an angel investor?
In the United States, angel investors are often persons with “accredited investor” status, though this is not required. The Securities and Exchange Commission (SEC) defines an “accredited investor” as a person with a net worth of at least $1 million (excluding their primary residence) or having earned at least $200,000 annually for the past two years, or a combined income of $300,000 for married couples. In contrast, accredited investor status is not identical with angel investor status.
Regarding EU legislation, there is nothing to anticipate in terms of angel investment, as this tax is a matter of national sovereignty. According to the EU Commission, EU nations are responsible for promoting business angel investment via instruments. They should offer incentives to those who are eager to invest in businesses. This should involve the co-investment of public money with business angels.
How angel investing works?
Typically, angel investors support a startup firm in its early phases. Frequently, these enterprises may not even have clients or earn any income; they may merely have a good business strategy, a beta test, or a minimum viable product. Capital from angel investors is usually used for R&D, to assist the firm in formulating its product and service offerings, designing its business strategy, and identifying its target market.
Venture capitalists often give the next round of money to a company as its manufacturing, operations, and marketing grow and get bigger.
There is no minimum or maximum investment amount required to be an angel investor. The value might range from $5,000 to millions of dollars. It depends on the circumstances. In exchange for the cash investment, the business often grants the angel investor a set number of shares or the ability to purchase shares at a later date.
How to become an angel investor?
Numerous angel investors have a well-established network of startup founders and entrepreneurs within their specialized area. Because they talk to these people on a regular basis, they often hear about new companies and can spot possible investment opportunities.
When an experienced angel investor decides to fund a business, they can also form and head an angel syndicate, which consists of a group of angel investors that fund a particular deal collectively.
If you don’t have access to this kind of network, you can talk to a startup founder directly if you find a company with an interesting new business idea that you’d like to learn more about and possibly invest in.
Participating in an angel group enables you to have access to a network of angel investors who evaluate and invest in startup enterprises collectively. In the United States, the Angel Capital Association’s member directory can assist you in locating a group to join, and its website contains information on how to organize your own angel investment club. Also, besides Funding Post, AngelList, Microventures, and Angelsoft, there are a number of additional organizations that promote various angel investment options. In the European Union, there are a variety of angel investor networks, including EBAN, Business Angels Europe, and the European Super Angels Club, as well as a number of national business angel networks and organizations.
Pros of being an angel investor
There are a few justifications for considering being an angel investor.
High possible returns
With the majority of investments, the greater the risk, the greater the potential return. Since angel investors assume such a high level of risk, they seek for substantial returns. If their venture is successful, angel investors could make 100 times or more their initial investment.
Portfolio diversification
This is just another reason why angel investment might be attractive. Compared to investing in standard equities and bonds, investment in early-stage private enterprises has a distinct risk-return profile.
Fulfilment
Angel investors, especially those who are entrepreneurs themselves, may love being a part of fresh industry advances and desire to support businesses with ideas they like and wish to see realized.
Cons of being an angel investor
As every coin has two sides, angel investment offers both advantages and disadvantages.
High risk
Angel investing may be dangerous due to the untested nature of the investments and enterprises. According to worldwide statistics, 75 to 90 percent of new businesses fail. Although it is possible to earn a profit, many angel investors lose their entire investment. This is why experienced angel investors usually participate in numerous firms across a variety of industries; doing so helps to spread the risk. Because the return on a successful investment is significant, a single success can more than compensate for the failures of the others.
Angel investing is not a method to become wealthy rapidly. It may take seven to ten years or longer for a company to reach a level of maturity where investors may profitably depart. It’s essential to invest only funds you won’t need in the near future, as well as those you’re not too afraid to lose.
Lack of control
Typically, angel ownership is 1% or less. If you own 1% or 3% of a company, you have no power over its operations. Most of the time, this is OK because angel investors seek to assist businesses, not manage them. However, occasionally it is obvious to investors that a founder is poised to make a grave error. In such situations, a tiny investor can warn the entrepreneur, but has no influence over what transpires afterwards. Occasionally witnessing businesses voluntarily go off cliffs is quite aggravating.
No genuine feedback
After receiving a seed investment, a firm may require five, seven, or ten years to get a return on its investment. During this period, the investor does not know whether they made a wise investment, and interim data points might be deceptive. Working in angel investment is essentially a guarantee of insecurity and imposter syndrome regarding one’s abilities. 80% of your profits will come from one or two investments due to the power law distribution of returns. When this occurs, you constantly wonder if you’re good or just lucky.
