If you are a business person or just want to delve deep inside this broad ocean, you will find terms such as angel investor that may be really hard to crack. So what is an angel investor? These are individuals investing as a form of equity financing for medium and small enterprises. Such an investor is an individual or body of individuals. The group is also known as a syndicate who chooses to invest in another business by financing their needs in exchange for a share of the business.
The shares which the angel investor takes comprise the equity stake. The investor gets an equity stake out of his contribution. Meanwhile, the entrepreneur gets financing for their business, to develop a new product or fund a marketing strategy.This article seeks to breakdown the relationship between the angel investor and the company.
What Is an Angel Investor?
Angel investment differs from venture capital finance. Venture capital financing operates by investing in businesses using managed funds, from public or private money. The fund finds the venture capitalist manager who invests on its behalf, aiming to earn profit returns for the fund investors. Venture Capital avoids startups and seed stage businesses. This is because they involve a high risk and high administrative costs.
Business angels make independent decisions on which business to invest in. They don’t need to make consultations with a third party. They engage in meetings directly with prospective entrepreneurs and see them pitch their businesses. Angels are involved in the whole investment process and become signatories to the legal documentation involved. The angel investor, as an individual or as syndicate may take an active role on the board. It may also contribute passively as a syndicate where an appointed person takes the role on behalf of the others, thus telling what is an angel investor.
Which Businesses Apply for Angel Investing
- Pre-revenue businesses: What is an angel investor in this case? Here, an investor requires that the entrepreneur should prove their concept, in form of customer interest. This is proof of that the product can actually work as a convincing demonstration of the business itself. Angel investing at this stage of the business is a highly risky venture. Therefore, the entrepreneur has the tough task of proving their concept and its financial viability or have the intellectual property protected. A patent or copyright comes in handy, as technological and scientific ventures are most likely to fall under this category.
- Profit generating businesses: Companies already generating profit are most likely to secure an angel investor for themselves as there exists a higher likelihood of return on investment.
- Idea stage businesses: This stage is not ideal for angel investments. Entrepreneurs seek accelerators instead, by turning to family and friends or grants if possible.
What to Look for in an Angel Investor
An angel investor ought to have high net worth, as determined by the relevant regulatory body. The Securities Exchange Commission for instance requires that an accredited investor should meet the threshold net worth of $1 million and an annual income of 200000 USD or 300000 USD jointly with their spouse.
So what is an angel investor for your business on the long run? A company enjoys numerous benefits upon getting an angel investor. These include:
- A source of finance for its operations;
- Mentoring and expertise advice;
- An opportunity to grow and expand;
- An opportunity to enjoy economies of scale
In some cases, this investment ends up disadvantageous to the company.
- For a domineering angel, the owner runs the risk of being fired from the company they created;
- Angel investors may opt to sell the company in form of public offer;
- The business can be acquired by another company, so that investors can get their earnings back;
- The owner ceases to be the sole owner by giving away between 10-50 percent of the shares.
3 Tips to Prepare Your Company for a Future Angel Investor
1. Opening to Ideas
Angel investing not only seeks to finance startups and early stage businesses but also provide expertise knowledge and experience for these companies. The investors want to invest in business that would have return on the amount of investment put into to it after a long period of time. This ranges from three to eight years, depending on industry and the angel investor’s preferences.
The investor, therefore, has the task of ensuring that the prospective business meets their expectations in terms of expected returns. This means that they will go through the business plan. So before considering this type of idea, make sure that you are open to learning what is an angel investor.
2. Take a Close Look at Management
It is the most critical part an angel investor looks at before making their decisions – the experience of the team. This means the below.
- How long they have worked in the same or similar field;
- How well they have performed while at it;
- The skills they have each acquired;
- Their drive and how they present themselves.
3. Pay Attention to Details
An angel investor expects that the prospective business meets a majority, if not all of these expectations.
- Problem solving: The business should carry a solution to a societal need. This can be through a product or services.
- Protection: An entrepreneur should be able to confirm ownership of the business. The product or technology may have patents, copyrights, branding or other intangibles.
- Competition: The ability of a business to defend its position in the market is important. This translates into how its competitors are performing. The uniqueness of its selling point is also important.
- Revenue: The expected gross and net margins form the major part of consideration. How the business makes money and its revenues streams also count.
- Proof of the model: Does the market validate the product? Results from market tests and surveys may be necessary.
- Willingness: The willingness of the owners to give up shares in the business in exchange for investment also matters. In some cases, the investor may have to be on board.
The decision to find an angel investor should be made after proper consultation with both legal and financial advisers. This will bring you clarity and certainty.
Consultation with other entrepreneurs also helps in familiarizing you with this form of business financing.
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