What Is Angel Investment?

What Is Angel Investment? Guide to Startup Funding

One of the most difficult aspects of making a startup successful is securing the sources of funding needed to operate the business. In fact, many small businesses fail simply due to cash flow problems in the early stages.

There are a number of different ways to fund a startup or small business, but not all are available to an entrepreneur, especially if they do not have collateral or a track record to fall back on in business.

Aside from wealthy individuals who can fund their own startups using their own money without outside investment, how does an entrepreneur find the money to either launch the startup in the first place or to push the business to the next level?

Often, a business can launch and be relatively successful but will not generate enough revenue through sales alone to be able to fund its growth. This can leave the business in a situation where it is stuck at the same level, and never able to grow.

When an entrepreneur does not have enough personal funds to invest any more money into their business, and bank loans, which are particularly tricky to secure for a startup are out of the question, what can be done? The good news is that there are alternative options. Perhaps for brand new startups the next best funding option is to consider something called angel investing. But this raises the question, what exactly are angel investors, and how can a startup make use of them in their own business?

What Exactly is an Angel Investor?

Angel investors are typically private investors with a high net worth who put their personal funds into early-stage startups.

The main reason why angel investors will fund early-stage companies is because there are a lot of potential upsides if the business is successful, much more than traditional investment strategies such as investment funds.

Whilst the rate of return for the individual investment can be a lot higher, the risk is also increased since many companies go out of business. This is why it is so difficult for a new company to acquire a business loan; banks are typically unwilling to take the risk on an unproven business.

It is also worth noting that angel investment can come from groups or syndicates of angel investors who band together to invest proportionally smaller amounts (per person) into startups. Often, the individuals who form these angel groups are still high-net-worth individuals, but they operate in a group so that they can spread their investments out across a number of companies in their earliest stages, to give these business angels a better chance of a return.

In terms of funding size, angel capital sits on the lower end of the scale when compared to Venture Capital, which deals with a lot more investment money. Another key differentiator to some other investment types is that angel investors also bring other advantages to the table, such as business mentoring and advice.

Another characteristic of angel investors is that they are usually classed as accredited investors which means they meet a certain set of financial criteria as investors. The criteria can vary depending on the country the investors operate in, but it often relates to a person’s net worth. In some cases, being familiar with the industry involved helps too - as many angel investors are not just high net worth individuals, but were once business entrepreneurs in the same sector themselves.

How Angel Investment Differs

As already touched upon, angel investment is different from traditional investment from banks, public offering, and venture capital firms since the bar is often set a little lower in terms of what is required from startup companies. Angel Investment tends to offer much more flexible terms, and entrepreneurs can often negotiate with angel investors to ensure they get a deal that is beneficial to all concerned.

Another great benefit of angel investment is that the documentation required by angel investors tends to be less stringent than you might have to deal with from a bank, or government grant, who often make brand-new companies jump quite a few hurdles before any money is released. For fast-paced businesses that need investment quickly, often an angel investor is a good option since they tend to make decisions much quicker than traditional investors.

That’s not to suggest that angel investors won’t do their due diligence and won’t want to get down to the nitty-gritty of a prospect’s financial performance, but there will be less administration needed potentially.

A key difference for startup businesses is that angel investors are often more than just being financially invested in the businesses they fund. Often, they are personally invested too, and can sometimes offer mentorship, advice, and business connections that can aid in the success of the business. This is similar to venture capitalists who also can provide this kind of assistance, such as managerial expertise.

Not all angel investors are ‘hands-on’ with the businesses they invest in, so for entrepreneurs who are looking for this kind of additional support, this is usually established at the negotiation stage between the investor and entrepreneur.

An important aspect for entrepreneurs to consider is that it is important to find angel investors that are a good fit for the business since this can be the difference between success and failure. Finding angel investors that can offer advice, business connections, and expertise can be important for fledgling businesses and for entrepreneurs who have a good idea, or talent, but lack the business acumen to make their ideas a success. It is common to find angel investors who specialize in a particular market or industry.

The key thing to note then, is that angel investors offer entrepreneurs running early-stage companies, a combination of financial investment and business expertise.

Building strong relationships with angel investors is crucial for long-term success. By maintaining professionalism and leveraging their expertise effectively, startups can build long partnerships that may extend beyond the initial investment. It is common for entrepreneurs to work together on future projects once a successful relationship is formed.

Another key takeaway is that often an angel investor will be looking to acquire an equity stake in the company that they invest in. This means that the entrepreneur will give the angel investor a percentage of the ownership of the company. This is a common arrangement, and it is why angel investors are happy to invest in start-ups since the upside potential can be high. The downside is that if a startup fails and goes out of business, the angel investor can lose their private equity stake.

How to Find Angel Investors

Entrepreneurs who are looking to find an angel investor will first need to have a comprehensive business plan in place. They will need to also have all their financial statements in order, such as income sheets, expenditures, and valuations. These numbers will need to align with your business plan and reality.

While angel investors are less stringent in terms of requirements than banks, they will still need to see that your business has the potential to make money and be successful.

Entrepreneurs should expect that angel investors will spend time studying the business’s documentation, and pitch proposal while discussing the prospect together to carry out proper due diligence on the potential investment. This is also a good opportunity for the entrepreneur to establish whether the partnership will work for them, which is an often overlooked aspect of making the partnership work successfully.

This is also the time when targets are established, whether there will be additional funding rounds for your startup based on performance, and what the exit strategy will be for the angel investor.

Finding Angel Investors

For many entrepreneurs, the most difficult aspect of finding investment for their startup business is actually finding willing investors. This can be a difficult process especially if the entrepreneur doesn’t have a long track record and established business connections.

The good news is that the Angel Investment Network is the perfect vehicle to help connect entrepreneurs looking for funding, with high-net-worth individuals who are looking for potential successful projects to fund.

Investors can sign up to the Angel Investment Network and submit their pitches virtually so that investors from all around the world can view and potentially invest in the business. Think of it as a marketplace for business startups.

Online platforms like the Angel Investment Network are a fantastic way for entrepreneurs to build valuable business contacts and find investors, and in turn, investors can easily find projects and start-ups that interest them, quickly and easily.

Angel investment is a great funding option for startups, with the upside being that these relationships often provide more than just capital. Mentorship and business connections are powerful tools that can help a business succeed, where so often they fail. Sign up to the Angel Investment Network today to search for investment opportunities or to find funding for a startup enterprise.