What are Angel Investors?
Angel investors are individuals, usually retired entrepreneurs and executives, that offer funding to start-up businesses. The term “Angel Investor” is somewhat fitting considering that an Angel investor is often the only way that a start-up company, or a business in financial difficulty, can survive the tough economic times or the initial stages of a business where expenses are mounting but revenue has not yet begun to make the business lucrative.
Studies have shown that businesses who have the backing of Angel investors are less likely to fail. The influx of capital, as well as the counseling, networking, and other resources that an angel investor can be the difference between a business thriving or going under. Angel investors in the United States account for 60 times more investing in businesses than venture capitalists. Where venture capitalists will only invest in large businesses, an angel investor is likely to invest in smaller business where they envision rapid growth.
An angel investor will often invest as much as $1 million to $2 million for a business with the average being around $450,000. In return an angel investor will require some type of debt or equity in the business. Angel investors also invest only in companies that they feel will have a high rate of return. The average angel investor is looking to have their investment produce returns of 10 times their initial contribution within 5 years. Investing in start-up businesses is a high risk venture and a such angel investors seek a high rate of return. This is due to the a low success rate where 20% – 30% of investments fail. So for every 5 investments that the angel investor contributes to they expect to lose on 4 of them and as a consequence angel investors seek high returns from those that succeed.
There are numerous ways to seek out angel investors. The first, and easiest, is to seek help from friends and family. This has its advantages because they are more likely to play off emotions and give you a loan. The disadvantages are numerous. Borrowing money from friends and family can often cause a disruption in the relationship. You will also only be able to get so much capital from using this route and lastly, you will not gain the experience, networking, and counseling that you can receive from a professional angel investor or someone retired from that industry.
Another option is to set up internet advertising and using internet resources to request angel investors. Many times angel investors are looking for investment opportunities, they don’t come to you. Many angel investors are retained simply because they saw your product or business model online and thought it was interesting and possibly lucrative.
You can also go directly to the angel investor yourself. Many angel investors have their own angel investor companies with websites and contact information looking for entrepreneurs to invest in.
When you meet with an angel investor you want to be prepared and open to discussion. Many angel investors will not only want a guarantee on their return, and securitization, but also control over the start-up business. You should consider this seriously. You will receive great benefits in your business decisions by someone who has a large stake in the business and has obviously done well in finance in the past. However, this is your business and you don’t want to give up absolute control of your company. You may want to percentage of ownership, mandatory consulting, or a number of other options.
Also, be prepared. Have you business plan concise and in working order to present you the angel investor. The best way to get an angel investor to contribute to your business is to show them that you have a direction and you know what your goals are and that they are attainable.