Are you a startup looking for that little bit of investment to help you kick on to the next step of development? Well, if that’s the case then you need some business angels in your life. Business angels or angel investors are basically wealthy individuals or a group of individuals who invest or finance equity for small businesses and startups.
Angel investors basically provide a second round of investment for businesses helping them move on with their growth. The first round of money or seed money to establish your business comes from you and maybe family and friends.
After that, the companies usually move towards debt or equity financing for further cash inflow that is required for the development. However, there are times when the businesses aren’t able to gather the funds necessary from traditional methods.
This can happen either due to tight credit markets or because the lending institutions deem the business as a risky venture. That’s when angel investors come in. Becoming guardian angels for the businesses by helping them raise funds necessary to move into the next step. So how do you identify a business angel or angel investor?
Well, in the following passages we will talk about what a business angel is and some other things that you should know about them before you go into business with them. So let’s begin.
Like I said before business angels are angel investors. Now they are a bit different from your regular investors where they have to be accredited by a federal institute. Now a traditional accredited investor usually needs to invest a large sum of money and they need to have a huge amount of assets to be qualified and accredited.
But business angels don’t have that limitation. Even though many angel investments come from accredited investors, not all angel investors can be categorized as an accredited investor. For that, they need federal accreditation.
Now business angels may be solo investors but you will find someone who is part of angel investor firm or group. Since there are no presets to being an angel investor you will run into different types of people. Most of the time you will run into business angels that are very knowledgeable about investing in the private sector.
While there are investors who just go along and learn on the fly. You will run into people who will ask you about funds and grants eligibility as well. You might be asked about things like innovation technology fund, global innovation fund grants, local government innovation fund, and workforce innovation fund grants, etc.
They will ask you these things to check your seriousness most of the time so make sure you are prepared beforehand. But these aren’t the only types of angel investors. You may even find business angels that want to be involved in some way or another with the companies they are investing in.
So it is your prerogative to set the terms and find the ideal business angel. You cannot put all types of angel investors under one umbrella as they differ so much from each other. However, one thing they all have in common is that they expect a return of 20% – 40% return on their investment.
One of the major differences between business angels and venture capitalists is that business angels usually tend to invest in small businesses. This means that they usually invest a small amount of money ranging from 20000-50000 Euros.
Whereas venture capitalists invest in millions. This is why angel investors are a much more sensible option for small businesses to take up. Now there is one thing where these two types of investors are the same.
That is they both ask for a huge return on their investment when financing startups. This is because startups are small businesses that come with a very high, risk factor. So you may even find investors asking for 10-30 times the return on their initial investment.
Did you know that some of the biggest companies in the world were funded by business angels? Companies like Amazon, Apple, Starbucks all got their start because of the angel investors taking a punt on them.
But it wasn’t a cakewalk for any of these companies. As the founders of these companies would tell you, finding and securing angel investment is one of the hardest things a startup has to do. The process is rigorous, complicated and time-consuming.
Angel investors work with taking great risks by financing unproven ventures. This is why they usually take their time assessing the potential of the business. One of the first things they will look at from a startup is to see if they have a solid business plan or not.
Then if they pass that the business angel will conduct a series of checks. This will include due diligence and perform competitive analysis. Now 90% of the startups fail to pass to this phase and then the selection process begins.
This is the same for government funding for innovations as well. Now even if you have a great startup you may be refused the first few rounds so you have to make up your mind about needing to make several rounds to secure equity investment.
Every country has angel investors and angel investor firms. Now if you know someone who can be your angel investor then it’s amazing. Not everyone knows someone who can invest huge amounts of money in a startup. This is where investment firms come in.
You will be able to find plenty of local or national angel investment firms for you to check out. You should also try securing You should also try looking into your local chamber of commerce. Try talking to local attorneys, bankers, and accountants.
These types of people are usually familiar with business angels and will be able to suggest angel investors for your business. On top of that, there are angel investor networks you can find on the internet that will help you secure angel investors for your business.
Companies like Solutionery helps tech startups find the right equity financing solutions tailor-made to their specific needs and demands. Now your angel investors may ask for a seat on the board of directors.
It’s up to you to decide whether or not you are going to accept it or not. Now, for startups having a veteran finance man on the board usually is a plus point. So many startups offer seats on the board as well to business angels. These members can then use their expertise to secure the next round of funds for their growth. But this is your personal choice for your business.
Now like everything else there are pros and cons of business angel investment. One of the biggest pros of this is that angel investment carries a far lesser risk than debt financing. This is because the capital is invested and not a loan.
So a startup does not run the risk of having to pay the investors back if the business fails. Business angels understand the business and usually take a long term view on their investment. On top of that, they are usually looking for a personal opportunity on top of it being an investment opportunity.
Now there are some drawbacks to angel investment. A major con of angel investment is the fact that you will not own the startup completely. Your business angel will be a part-owner of your company meaning you won’t have complete control of the business.
Whereas if you are debt financing then the institution lending the money has no control or say on what you do with the company whatsoever. Along with that if you decide to sell the business then they don’t take a portion of the profit or sale. However, an angel investor will take part of the profit and money that may come from any sort of sale.
Angel Investor is basically a blanket term for anyone who invests in your startup. This is why the type of people who can be considered angel investors are vast. Some common are listed below:
Family and Friends are the quintessential types of business angels. For many business owners, family and friends are the only viable option for funding.
Given the long relations, they harbor and the risk involved startup owners may have no other option than to gather funding from their friends and family.
So this is another common option for new businesses. These types of business angels are made up of businessmen, doctors, lawyers, and other wealthy individuals in your community. Now the angels find you or you find the angels through word mouth at most times.
People you may know may have investment capability or business associates may know wealthy individuals who want investment opportunities usually partner up with startups in return for equity. Now you set the terms of investment and come to an agreement but make sure you ensure the funds you need.
These are basically a collection of people who work as firm or collective and provide angel investment solutions to startups. Solutionary is one of those companies that take into account the need for funding and nourishment for people who are starting out.
Companies like Solutionary have a host of different investors that contribute to the collective and they have a management team that vets investment opportunities for them.
So crowdfunding is one of the recent trends where a startup opens up a gig in a group where people can invest extremely small amounts of money in the business. The business hands in a target fund and asks a vast community of people to help the company finances.
This has recently worked for highly-specialized small businesses. These companies that take up crowdsourcing or crowdfunding usually use innovative methods like Digital Marketing services to ensure they reach a large number of potential investors.
Remember you are trying to create a business. A certain amount of money is involved. So it is of the utmost importance that you have clear lines of communication between you and your potential business angel or angels.
Make sure that they understand your vision and you understand their goals. If they are going to involved with the running of the business then make sure you see their level of expertise and what it can do for your business.
Finding the right business angel means you need to keep communications to a highly efficient standard. So make sure you do that. With that being said we are done.
Let us know in the comments below about your investment-related problems and we will let you know the solutions you can undertake. Till, next time, bye.