In generic terms, a person who invests in a new or a small-scale business venture and provides capital funds for start-up or expansion of business is known as an angel investor. It comprises individuals who have some spare cash available and are seeking a higher rate of returns as compared to other forms of investment. An angel investor usually seeks a return of 25 per cent or more.
This type of investment is a form of equity financing, which can be defined as the supply of funds by an investor against an equity position in the company. This type of venture financing is normally opted by nascent-level businesses that lack sufficient cash flow or collateral to support any business loan from other financial institutions.
Angel investors bridge the gap between small-scale financing provided by your inner circle and venture capitalists. Creating a favourable impression on a prospective angel investor is tough, but there is a standard operating procedure which one can follow to attract the same. But first, it is necessary to contemplate whether angel investment is beneficial for your business.
Pros and Cons of Angel Investment
The biggest advantage found in angel investment is that opting for finance from an angel investor implies a lesser risk than debt-based financing. Invested capital does not have to be paid continually in the event of a business misfire, unlike a business loan. On the other hand, angel investors come well planned, with the long-term potential of business all calculated. Added to that, an angel investor is also looking for a personal opportunity- apart from an investment.
On the flip side, the biggest disadvantage of having an angel investor onboard is the degree of loss in complete control of the company. With an equity position, the angel investor will now have a say in company decisions as well and will receive a certain percentage of profits if and when the business is sold. With debt financing, the lending institution will have no control over management decisions and will receive no share of profits.
Sources of angel investment
Angel investor is a very generic term, and one can find these types of investor in quite a few different forms. Angel investors normally comprise:
● Family and friends:The most common source of funding for business startups consists of family and friends and happens to be the only resort for many. Given the high rate of failure of nascent businesses, it is also risky in terms of the possible impact upon relationships if the business takes a strong hit. It is necessary to be transparent about possible risks and a potential failure before seeking for funds from family and friends.
● High net worth individuals:Another good source of angel investment is successful individuals- established businessmen, doctors, lawyers and others who have a high net worth. These investors usually invest a sum of $500,000 or upwards, in exchange for equity. Often this is executed by spreading of word by business associates or through a local chamber of commerce.
● Syndicates:Angel investors are increasingly operating as a part of a syndicate which consists of an organised group of angel investors which raises their investment potential accordingly. They contribute funds to the syndicate and a professional team chooses prospective businesses on behalf of the syndicate.
● Crowdfunding:A form of online-based investment where funds are raised by having a large group of individuals contributing amounts as low as $1,000.
It is necessary for a business person considering angel investment to be crystal-clear on what the investor is bringing to the table, apart from the funds- such as business expertise or access to a network which will be beneficial for the company in the long run. It is also important to develop a comprehensive understanding on what it would be like to work with the prospective angel investor and whether there is a conflict of ideas which might prove to be fatal for the company's health in the future.
It is also important to have a detailed business plan in place. As a nascent-level business, one will need to have an iron-clad business model to secure financing from investors.