Business angel investors are business persons that provide funds for start-up businesses to start their ventures. Many businesses, especially the start-up ventures that might find it difficult to secure funding from institutional lenders, are often rescued by business angel investors. The institutional lenders (for example, banks, mortgage institutions and financial institutions) typically have a lot of processes and rules in place that bar them from lending to small businesses. For example, a bank might not lend money to a business venture that does not have prior experience in a specific line of business. A business angel investor, on the other hand, might not have such reservations and will be solely driven by profit motive. The sole consideration would be the returns on investment, and if the prospect of returns seems good, then they are sure to invest money.
Though the exact figures of lending might not be available, the amount a business angel investor invests might vary anywhere between $1, 50,000 and $ 1.5 million. The word angel comes from the practice of wealthy and affluent businessmen investing in Broadway businesses way back in the 1900s. No doubt, the business of angel investment has really become big over time.
The business of angel investment has really grown big in terms of investment amount over the years. Small Business Administration estimates that there are at least 250,000 business angel investors in the United States alone and they have funded about 30,000 small companies per year. The average amount invested per year is anywhere between $20 billion and $50 billion. Exact details about the nature of investment might not be available because of the secrecy that is maintained in these businesses.
The business of angel investment has not only grown in size and amount, but also evolved in terms of involvement in the business over the years. Business angel investors these days take active interest in the businesses they are investing their money in. In fact, they make every effort to help the business grow by offering expert advice, consultancy, personnel and skills. Obviously, the business angel investors have become more aggressive and want to ensure that they get the value of just about every dime they are putting in. This means better days for the start-up ventures as they are getting assistance from the business angel investors in the form of expert advice, consultancy, personnel and skills. This is helping them grow faster. However, critics of this tendency point out that this might mean that a business angel investor might unnecessarily be interfering in the matters of the venture.
Let us take a look at the various advantages that a business angel investor can bring to a business venture.
First, business angel investors usually provide the greater part of the capital to entrepreneurs. The entrepreneurs usually turn to a business angel investor when all other sources, like institutions and acquaintances, have failed to extend the required capital to start the venture. According to a study by the Center for Venture Research at the University of Hampshire, business angel investors are known to provide as much as two-thirds of the total capital requirements.
Second, business angel investors are known to have fewer reservations than the venture capitalists about start-up ventures and can invest capital from their own funds. Venture capitalists, on the other hand, prefer ventures that have been in business for a certain period of time and have proven their credentials.
Third, start-up ventures usually look at business angel investors because of their flexibility and willingness to participate in start-up ventures. Institutional lenders and venture capitalists might be bound by a set of rules and regulations and might not be willing to invest in a business. Business angel investors, on the other hand, invest from their personal funds and are more flexible.
Fourth, a new venture not only needs capital, but also skills, experience and expertise in related areas to do well. A business angel investor typically brings a lot of experience and skill to a new venture. A business angel investor is usually an experienced entrepreneur who has helped multiple ventures get started. No doubt, the new ventures will immensely profit from their experience and skills.
Fifth, a new venture is always a high-risk venture and statistics point out that a greater percentage of such ventures go bust in the first few years. A business angel investor is however undeterred by these risks and is willing to invest with a positive outlook. A business angel investor typically demands high returns to negate the risks.
Sixth, a business angel investor does not typically require high monthly fees or instalments to repay their investment, unlike institutional lenders like banks. The business angel investors are keen on developing the business and getting their returns in the end. This enables the new entrepreneurs to focus on their business solely.
Let us take a look at the various disadvantages associated with business angel investors:
First, it is generally believed that business angel investors are good at lending the starting capital but reluctant at providing the follow-on capital, required after a period of time, when the business wants to expand or overcome setbacks.
Second, critics point out that many business angel investors are solely driven by profit motive and may be impatient with entrepreneurs. A business needs time to break and an impatient business angel investor can actually prove a hindrance.
Third, as pointed out earlier, a business angel investor may seek a certain amount of control in the business and may want certain things to be conducted in a specific manner. This may cause a certain degree of resentment in the entrepreneurship and things may get worse for the business if the business angel investor does not have the required knowledge and experience.
As indicated earlier, new businesses will more often than not find it difficult to obtain funds for their business and that is where the business angel investors will really come in handy. The new entrepreneurs will need to choose business angel investors carefully and ensure that the investors have proven expertise and knowledge in the field. Also, a business angel investor needs to have a proven record of investment.