What are Angel Investors?
Angel investors are a form of informal investors having the high net worth usually generally among the entrepreneur’s friends and family who invests their own money in entrepreneurs starting the business either in the form of one-time investment or ongoing money supply to help in the early stages with very favorable terms to the startups. Since the level of risk involved in such type of investment is very high, usually they are investing initial capital in exchange for convertible debt or ownership equity i.e. they get control in the equity ownership of the business.
In other words, Angel Investor is someone who puts their own funds during the early stage of a company and also contributes through their business experience. These are usually wealthy individuals who either invest in the personal capacity or through crowdfunding platforms online or build angel investors network to pool in capital together and then invest in early-stage startups in which they have a personal liking to a product or find the business idea compelling enough to become a big success.
How does Angel Investors Work?
- Starting a business requires a great idea and execution capability on the part of the entrepreneur, among many other factors. However, along with all this, a startup requires initial funding, which forms the base behind converting that idea into a profitable business.
- Usually, initial funding is done by the entrepreneur itself through bootstrapping (Bootstrap is a situation in which an entrepreneur starts a company with the help of personal finances). However, not all entrepreneur has funds to bootstrap effect and put their ideas into reality and as such, requires funding from external sources.
- Angel Investor’s job is not to build the company in which they plan to invest but to make an investment or build an angel investors network which can be either a small investment for the idea to get started or it can be a large amount and also to provide business insight and mentorship. The initial investment made by them is called Seed Funding, and it usually varies, but in most cases, it won’t be more than one million pounds (varies from country to country).
- Angel investor’s network represents individuals, but the investment is made through different business forms such as a Limited LiabilityLimited LiabilityLimited liability refers to that legal structure where the owners' or investors' personal assets are not at stake. Their accountability for business loss or debt doesn't exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies.read more Company (LLC), trust or an investment fund, or other kinds of investment vehicles.
- This varies widely, but a common similarity among all is the risk appetiteThe Risk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more they possess and the minimal demand and control in return they wish to have. They only take a share in the equity of the business that holds no value at the time of investment and may become invaluable someday.
Importance of Angel Investors
Angel Investors network specializes in early-stage business. They are focused on helping startups take their first step in testing the viability of the business idea. They usually invest in the entrepreneur starting the business rather than the viability of the business as an investment is made even before business viability is tested. The capital provided by them can either take the form of a one-time investment, or it can be ongoing capital support to help the company navigate through its difficult early stages and reach a level where its product/ service has been tested, and Venture capital can come forward for investment.
They take a high level of risk as the majority of startups seed by them fail during their initial stages and results in loss of investment for the Investors. Hence These usually take a good share of equity ownership and have a clearly defined exit strategy in the business they invest their fund. They fund promising startups in the hope that they will be paid out several times the initial outlay once the company becomes successful.
Types of Angel Investors
Let’s discuss the following types.
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For eg:
Source: Angel Investors (wallstreetmojo.com)
#1 – Affiliated
It includes those investors who personally know the business in which they are investing either directly or through any angel investors network
#2 – Non-Affiliated
It includes those investors who don’t know the entrepreneur directly and is not associated with the business line at all.
Who can Become an Angel Investor
The criteria vary from country to country based on legal jurisdiction but usually includes the following:
- Minimum Net Worth requirement ( At least $1 million in Net Worth excluding primary homes as per SEC requirement)
- Minimum Annual Income requirement ( At least $200000 per year as per SEC requirement)
Besides these, an Angel Investor needs to have a sound knowledge and must be well versed with the level of risk involved in making such investments.
Differences Between Angel Investors vs. Venture Capitalists
Differences Between Angel Investors vs. Venture Capitalists are as follows:
| Basis for comparison | Angel Investors | Venture Capitalists |
|---|---|---|
| Meaning | It includes wealthy individuals who make an investment in early-stage promising startups in their personal capacity. | It includes professionally managed firms that invest in high growth potential business after the basic level of groundwork is done by the business itself. |
| Who invest first | Angel Investment precedes Venture Capital Investment and is riskier compared to Venture Capital. | Venture Capital Investment succeed Angel Investment and is comparatively less risky as viability is already done. |
| Amount Invested | Usually, Seed funding which can be a small or large amount but not more than one million pounds. (varies from country to country) | It is larger in size compared to Angel Investment. |
| Involvement in Business | Angel Investor provide advice and guidance but are not involved in the day to day functioning of a business. | Venture capital Investment involves direct involvement in the business. |
| Time involved | It usually takes less time and paperwork. | It consumes a lot of time and requires thorough due diligence and research. |
Final Thoughts
Angel Investors Network plays a very important and indispensable role in the startup landscape. Not just they provide the initial seed capital, but also they nurture the budding entrepreneurs with their expert advice and mentoring. Mostly it has been found that successful angel investors are the ones who have worked in the same industry as the company they support by providing the initial risk capital.
Angel Investors Network takes a high risk as companies they invest in don’t have much publicly available information. These investors need to have high judgment skills about the entrepreneurs in whose promising business they plan to invest their money.
Angel Investors Video
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