Angel Investors

Overview

Angel investors are also known as business angels or informal investors. They are well-to-do individuals who are willing to invest their own money in businesses either as business capital or start-up funding. In exchange for their investments, they often seek either ownership equity or some form of convertible debt.

How it Works

Angel investors, unlike venture capitalists, invest their own money in the business. This money, however, may come from another business, a limited liability company, or a trust belonging to the individual. The size of the capital is usually small and is sufficient only for start-up financing and/or seed funding. These investors fill in a major gap and perform an important role as venture capitalists and are not available for small-sized funding below $2 million.

Angel investors usually come into the picture via referrals from family and friends and software firms have especially benefitted from them. Often times, angel investors come together and form groups known as angel groups or angel networks. Here, they pool their resources, capital, and information for the benefit of each other.

Benefits

Angel Investors perform an important role in providing start-up financing or seed funding where the size of the capital is considerably small and other investors are not available for the purpose. Another factor is that these young businesses may not qualify for other investment options because of their nascent stage.

Since they are usually referred by friends or family, they discount the need of an intermediary or a broker and are likely to be more trustworthy.

Usually, angel investors are retired entrepreneurs and executives and their interest goes beyond pure monetary reasons. They may want to be involved in businesses in order to keep abreast of current market situations, but not in a full time position. They may want to share their knowledge and experience for the benefit of the new generation of businesses. Therefore, they can not only supply the necessary capital but also help with valuable advice and contacts.

Costs

Since the angel investors are taking a huge risk by investing in new businesses, the return on their investment is also very high. In order to mitigate the losses that the angel investors may have to incur if the business fails, they usually seek to get back about 10 times or even more of their investment within five years. They also have a defined exit strategy usually in the form of initial public offering or acquisition. All of this makes angel investors a costly proposition, but the exact cost cannot be estimated because it depends on the business and the amount that you are willing to spend.

Timing

If you are looking for a small amount of funding for your already established business, or if you are venturing into a new business and do not qualify for other cheaper sources of funding, then now is a good time for you to consider angel investors. However, you should be prepared to shell out a huge amount in exchange for the funding.