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An angel investor can be an individual or group of individuals willing to invest in an unproven or a start-up company but with a well-researched business idea. Angel investors are typically the first port of call for Internet start-ups looking for financial back up, because they are more inclined to provide early funding than venture capital firms are. After investing in a company, angel investors take an advisory role without making extraordinary demands. An angel investor uses his own private funds to add to the capital needed to start a business in exchange for a fairly large share of ownership in the company, usually between 10-30%.
An angel investor makes a very high-risk investment, so they often look for companies that have a reasonable expectation of returns within five years. Often angel investment only offers about 20-30% profit on advanced capital, but this profit is still considerable.
Working with angel investors means acquiring venture capital from individual investors. These individuals look for companies that exhibit high-growth prospects, have a synergy with their own business or compete in an industry in which they have succeeded.
Like venture capitalists, many angel investors now belong to groups and networks where they pool funds together. Angel investor organizations make joint decisions about the best places to spend money. This could mean lesser new companies can find an angel investor. The screening process for obtaining one can be quite vigorous and tedious and a very few new businesses in the US and U.K are able to convince an angel investor to advance funds for their companies.
Companies seeking equity capital from angel investors must welcome the outside ownership and perhaps be willing to bestow some control. To successfully accommodate angel investors, a company must also be able to provide an ‘exit’ to these angel investors in the form of an eventual public offering or buyout from a larger firm. Angel investors are appropriate for companies that have increasing product or service sales and need additional capital to bridge the gap between the sale and the receipt of funds from the customer.
An angel investor will extract the most ownership of portions of the company for his investment. This is the most expensive way to get start-up money for a company, yet it is often the only way to get the necessary funding to begin a company, since venture capitalists may not be willing to invest. An angel investor justifies their high return if the company profits, by saying his investment is at the highest risk for being completely lost. This is risky investing, that offers the possibility of making a great deal of money.
How to convince or attract an angel investor to fund for your idea or start-up?
- Angel investors invest with the expectation of doing more than just getting their money back. They expect a good return on their investment - a return better than they can do on the stock market. For every dollar that an angel investor puts into a company, they would like to take seven dollars out, after taxes, in seven years.
You need to understand that most angel investors already are or have been successful entrepreneurs. They enjoy the thrill of helping to build and create a thriving enterprise.
There are, however, three categories of angel investors:
- The Economic.
- The Hedonistic: These types of angel investors are most attracted by the excitement of creating something new.
- The Altruistic: may be most concerned about helping his community or attracted by the potential of developing environmental technologies.
You need to determine which category of angel investor you’re trying to attract and tailor your pitch accordingly.
- A solid, complete management team with leadership ability is a must if you hope to attract angel investors. Essentially an angel investor is investing in people, so they need to see the evidence that your business is in the hands of people who are knowledgeable, competent and trustworthy and have the skills to lead the business to new heights.
- Angel investors want to see a business plan that is both convincing and complete. They want to see that you have developed a vision for your company and that you have given thought to the details of how achieve it. Angel investors want to see things such as financial projections, detailed marketing plans, and specifics about your market.
- While some angel investors invest by giving loans to a business, minority equity ownership position is the preferred choice for more than half of angel investors. Most angel investors will expect a formal shareholder’s agreement which lays out the nature of their investment and the return.
- For many angel investors, it’s not just about the money; they want to actively participate in developing the business. They act as a mentor and sometimes even take an active role in managing the company.
- Before an angel investor invests in your business, they will expect to see an exit strategy. Although angel investors are patient and willing to make long-term investments, they need to see how would reap the return on their investment. The sale of shares to the company’s principals is a common exit strategy for angel investors who hold equity ownership positions; the sale or merger of the company is a common exit strategy for debt-holding investors.
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