If you’re more or less active in the business circles, you have probably heard the terms ‘angel investors’, ‘angel funders’ or ‘business angels’ floating around. But what exactly do these enigmatic expressions entail? What is an angel investor and what role do they play in the world of investment? Is angel funding the type of initial funding your business venture should be interested in?
Introduction to angel investment
To put it simply, angel investors are individual investors with a high network and experience in the business sector who give financial support to entrepreneurs or startup companies, typically in their early stages. Investing in an early-stage business entails high risk, that’s why angel investors usually require a very high return on investment - a much higher one than other types of investment might. Generally, in return to their contribution, they receive equity stakes in the business, which makes angel funding a type of equity investment. Angel investors typically invest their own funds, as compared to institutional venture capitalists, who manage a pooled capital of certain collectives. As recent trends suggest, a growing number of angel investors choose to invest online through equity crowdfunding. Some angel investors organize themselves into so-called angel groups or angel networks to share investment capital, as well as to offer business advice to their portfolio companies.
Origins of the "angel investment" term
‘Angel’ used to be an expression to describe wealthy individuals in the Broadway circles whose funding kept theatre productions from closing their doors. It was a similar term to ‘patrons’, which is generally used to describe financial contributors in the artistic field. In the late 1970s, thanks to William Wetzel’s pioneering study, the term ‘angel’ started being used in the United States to describe investors who supported entrepreneurs raising the seed capital for their ventures. In recent decades such investors have been rising in numbers, and ‘angel investor’ has become a wide-spread term in the financial circles worldwide.
How does angel funding work?
A significant advantage of angel financing, as compared to debt financing, is a smaller risk for the entrepreneur. In the event of business failure, it is not required to pay back the money put in by the investor, unlike it is in case of a loan. However, since a large percentage of such investments are lost completely with a failure of early stage companies, it is angel investors who have to take the bigger risk. That is why angel investors require a high investment’s rate of return. Angel investors tend to choose to invest in business ventures that show potential to return the original investment ten, or more, times fold. Having a defined exit strategy, for example an IPO (initial public offering) or an acquisition, is vital for angel investors to limit losses. The effective internal rate of return for a successful portfolio may vary, but typically it is estimated to be between 20 and 30%, which is a much higher rate than for other sources of financing. It might seem discouraging to entrepreneurs who are just starting out, however for early-stage business ventures receiving funding from less expensive sources, like banks, is not always an option.
Angel investors do not only bring their capital to the table. As they are usually successful entrepreneurs themselves, their indispensable advice and experience in the business sector is just as valuable as the funding they provide. According to some research, angel-funded business ventures are more likely to succeed than companies with other forms of initial funding. Studies have found out a correlation between angel funding and higher success rates, finding additional funding outside the angel groups, as well as a higher growth rate measured through website traffic.
How to find an angel investor?
Getting the attention of an angel investor might not always be an easy feat. If you, however, feel like this is the type of financing for you, there are some things that you can do to make your business more likely to be chosen by such an investor. You must be prepared to provide all the necessary information and answer any of the questions your potential investor might pose. First of all, you ought to consider which factors angel investors find the most vital while evaluating a business venture idea:
Economic viability of the business plan
The company overview - unique features of your venture
A competent, experienced leadership team
A clear-cut view of the product or service
Competitor outlook - how does your business plan to stand out among competitors
Scalability - plans for growth and expansion of the company
Business metrics, existing revenue, profit margins
Initial customers or partnerships
An exit strategy
Learning how investors think is the first step you have to take while preparing to pitch your business idea. You must be able to sell your idea and make the investor feel passionate about your project. Since they are experienced entrepreneurs themselves, they can recognise a promising investment opportunity and have a good understanding of the risk involved. You have to convince them that your own belief in your business idea is not ungrounded, so that they can believe in it as well.
Okay, so now you know how to impress angel investors. But how exactly do you find one?
Networking is most vital in that process. There are many means of finding angel investors to support your business venture, you just need to know where to look. It is possible to do so through:
Lawyers, accountants, people active in the financial circles - ask around locally
Angel investor events
Angel investor networks and websites
One of such platforms allowing project or business creators to find connections with angel investors is Tecra Space. The platform allows entrepreneurs to pitch their business ideas, providing potential investors with all the necessary information, like a business idea overview, the project realisation roadmap or the analysis of economic viability by specialists. Crowdfunding platforms have been gaining popularity in the angel funding circles. Thanks to its blockchain solutions and transparent exit strategies, our platform provides angel investors with a much bigger security than typical investment platforms. Tecra Space strives to be the safest and most convenient place to connect inventors and investors, and by listing innovative startup ideas with big commercial value it might just be the platform where business angels come to seek business projects to invest in.
Advantages and disadvantages of angel funding
One of the biggest advantages of this type of funding, as mentioned in the previous paragraphs, is a smaller risk for the entrepreneur. Typically, there is no debt that the entrepreneur owes to the investor in case the business fails. Aside from the capital, the venture owner receives invaluable advice from the angel investors, who themselves are experienced and successful in the business field. Their experience also comes in handy in bringing forth many connections that could help to accelerate the process of the company's expansion and growth of the business revenue.
As almost anything else, these perks come with some strings attached. A business owner who decides to seek angel financing has to consider the possibility of giving up their complete control as the sole owner. Angel investors, who get stakes in the business, receive partial ownership in the venture. Sometimes, when their vision is different to that of the owner, it might mean the entrepreneur might have to surrender a part of their idea as to how the company is supposed to function and grow. Additionally, high rates of investment return for the angel investors also mean partially limiting future profits for the business owner. In the long run, it might however be secondary to actually making your business idea become reality.
This article was meant to provide you with the most essential information about this type of funding. In the end, you as the business owner have to ask yourself if the pros outweigh the cons, and if angel funding is something that will be right for you. If you do want to seek angel funding, consider using Tecra Space as the place to pitch your idea and gain the support of potential angel investors who will believe in your vision and help make your dreams come true.