Private Equity Tutorials
- Private Equity Basics
- What is Private Equity?
- Private Equity Analyst
- How to Get Into Private Equity?
- Private Equity Interview Questions
- What is Growth Capital?
- Term Sheet in Private Equity
- LP vs GP
- General Partner in Private Equity
- Clawback in Private Equity
- Preemptive Rights
- Types of Alternative Investments
- Private Equity Course
- Private Equity vs Hedge Fund
- Project Finance vs Private Equity
- Private Equity Books
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- Venture Capital
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- List of Top Private Equity Firms
- Private Equity in India
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What are Angel Investors?
Angel Investors are basically high net worth, affluent individuals who provide early-stage capital for business during its initial start-up stage. These investors are often an entrepreneur’s family and friends (but not always). These investors invest in companies which are at their very early stage with no revenue visibility and high level of risk involved. 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 put 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 the 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 their ideas into reality and as such requires funding from external sources.
- Angel Investors job is not to build the company in which they plan to invest but to make an investment or build 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 won’t be more than one million pounds (varies from country to country).
- Angel investors network represents individuals but the investment is done through different business forms such as a Limited Liability Company (LLC), trust or an investment fund or other kinds of investment vehicle.
- This varies widely but a common similarity among all is the risk appetite 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 specialize 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 onetime investment or it can be an 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
#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 who 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 business||Venture capital Investment involves direct involvement in the business|
|Time involved||Usually takes less time and paperwork||Consumes a lot of time and requires thorough due diligence and research.|
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 take a high risk as companies they invest doesn’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.
This has been a guide to what are Angel Investors? Here we discuss how angel investors work, its importance, its types, and criteria for becoming an angel investor. We also look at the top differences between Angel investors vs Venture Capitalists. You may want to learn more about Private Equity and Venture Capital from the following recommended articles –