It is likely that you have heard the term “angel investor.” However, you may have some questions about who they are, what they do, and how what they do benefits others.
Angel investors come from different walks of life. Some are lawyers, doctors, business associates, or people with a financial background. They are entrepreneurs who are willing to invest hundreds of thousands of dollars in a business in exchange for a percentage of the action.
These are individuals who have met the SEC’s definition of an accredited investor. Their net worth is at least $1 million, and they make at least $200,000 annually. Angel investors offer you money so that you can start your business. You then sell them equity in your company, filing the appropriate documents with the SEC. On average, angel investors invest around $600,000 in startups. Angel investors may team up with each other, allowing them to invest in multiple projects and with higher amounts of money.
The Pros and Cons of Angel Investors for Businesses
Angel investments can be a game changer for a business that is first starting out or for a business that is already established but is looking to grow. This business may be relatively new in the game or may lack the capital needed to put forth a successful marketing strategy.
Established businesses looking for an angel investor need to prove that they are already generating some revenue. An angel investor provides additional revenue, and they also bring their own experience to the table. Angel investors are motivated to be good mentors and to help the business they have invested in thrive because their money is on the line.
Angel investors bring with them some potentially negative things for the businesses they help. In exchange for the investment, a business owner owner may need to give away between 10 and 50 percent of their business. There also exists the real possibility that the investors will look at the business idea or model and think that it is a hit. The only thing that stands between the business and success, in their mind, may be the business owner. So they may fire a person from the company that they have created.
Understandably, angel investors are focused on results. They want to see an end game where they walk away with positive angel investing returns. They want more money at the end of the game than they invested at the beginning. This could mean walking away with a public offering, building the business to a point where it’s acquired by another company, or another scenario that could require the business owner to part ways with their enterprise sooner than they would have liked.
Why Angel Investors Are so Beneficial
A major benefit of angel investors is that they are not risk-averse. They go into a business understanding that it could be a high risk investment with a firm that has not established a solid track record of success. They know that most businesses fail in the first few years. Still, angel investors have a reputation for being optimistic about their investment choices. However, they do ask for a substantial amount of returns to offset their initial risk.
A second benefit of angel investors is that they are plentiful. There was a time when angel investors were only available to wealthy or connected people. Now, the common person on the street with a good idea may get access to the help of angel investors.
Angel investors have diverse interests. Some are interested solely in the technology sector, while others may be interested in manufacturing, design, art, etc. What most angel investors are concerned about is potential profitability and growth. They want to make money and want to make a name for themselves.
A third benefit is that angel investors are often more flexible with business agreements. They tend to see investment criteria differently than traditional lenders. The fact that they are able to invest their own money means that more times than not they will be willing to negotiate. For any new business or any existing business looking to expand, having a source of capital that is flexible and open to suggestions is a major advantage when starting out on the road to success.
Getting capital from an angel investor can be one of the best ways to get a new business up and running or to give an established business the added boost needed to grow to the next level. Success is dependent on there being a well drafted and thought out plan from day one, including a funding agreement that will meet the demands of the business owner and the investor fully.