Understanding Angel Investing – All You Need to Know

This article will provide a detailed guide on angel investing, the types of angel investors, and the pros and cons of angel investing.

Entrepreneurs with innovative business ideas only sometimes have the correct type of financing. While a business loan may sound conventional, the interest and debts you must repay can be overwhelming. Equity investors are known for helping business ventures with a limited operating history and low capital. They are also involved in the decision-making process and strategy drafting for businesses they consider to have the potential to generate revenue in the future. This article will provide a detailed guide on angel investing, the types of angel investors, and the pros and cons of angel investing.

Angel investing and angel investors.

Although angel investing is a great way to gather funds for promising business ventures, a prompt fund proposal with essential documentation is necessary. It also involves high risks and is suitable for investors who expect higher returns. So who is an angel investor? How does angel investing work? Read on to understand.

What is an angel investor?

Angel investors can be individuals or groups who put their money into startups in their nascent stage. For the funds they offer, these investors receive company shares in return. It is especially beneficial for entrepreneurs who need help to give a definite form to their business idea. These investors usually have a comprehensive knowledge of the business they are about to invest in. They can share their expertise with the business owners by offering financial support and technical and marketing strategies essential for their growth. The investment can either be a one-time settlement or financial support in installments that assists the company in sailing through its challenging initial phases.

What is angel investing?

If you have an incredible business idea and are wondering how to get it off the ground, you may need someone to fund your venture until it generates considerable revenue. Angel investing offers you just that but without expecting cash equivalents in return. These investors are keen on helping early-stage founders more than they expect financial returns. Angel investing can happen through online crowdfunding platforms or investor networks that gather funds and assist small businesses. A stable annual income of $200,000 is required to become an eligible angel investor. If the angel investing happens in partnership, the combined income must be over $300,000.

How does Angel Investing work?

Investors with high net worth and assets come forward to invest in startups that demonstrate potential returns in the future. The businesses they support are usually nascent, with no solid follower base or history of generating revenue or operating record. Investors rely entirely on the business strategy they demonstrate and the products. The financing resources are mainly used for research and marketing at this stage. The angel investing process does not have any restrictions on the amount an investor can offer. After receiving the funds offered, the Company shall deliver the angel investors a certain number of shares or the rights to purchase or sell shares in the growth stage. This is followed by venture capital funding in the subsequent financing round.

Pros and Cons of Angel Investing

Angel investors have higher intentions for the company they are involved in, without a doubt. But it is crucial to understand if the funding method is suitable for your business needs. To make an informed decision, you need to rule out the possibility of investment failures in the future. You should consider a few pros and cons of angel investing before diving in:

Pros of Angel Investing

  • Angel investors have the liberty to invest in firms that they choose. They can review the proposals and listen to hundreds of pitches before deciding which business shares their vision.
  • The business owners have fewer risks in funds received from angel investing. You are not required to repay the borrowed amount in cash, which allows you to grow your company without being anxious.
  • As most angel investors have enough experience in launching and running a business, entrepreneurs can expect to receive better guidance apart from monetary support.
  • For businesses with definite growth potential, this can be an opportunity to repay their investors by increasing the company’s share value.

Cons of Angel Investing

  • Angel investors may expect at least 10% – 15% of the company shares in return for capital funding. This means founders may have to transfer a few business aspects charges to the investors.
  • If the investor’s share allocation is not well planned, it may result in them gaining more control over the company after it shows value growth.
  • A business may take 5 to 10 years to show consistent revenue. It is risky from an investor’s perspective and requires much patience.

Types of Angel Investors

Angel investors have definite reasons to invest in a particular firm. Although the most common reason is to maximize their returns, there are a few other nonmonetary visions on which these investors choose to bet their money. Depending on these motives, there are five types of angel investors. Here is a brief description of each for your reference.

Types of Angel Investors

  • Family – Most Angel investors may not fall under this category, but the motive behind this investment is usually beyond money. As the name suggests, a family investor is someone from your family or a dear friend. This person helps you fund your dream business because they trust you and your potential. Since this does not have a formal structure of investment, there are no set regulations or restrictions on how much a family investor can offer.
  • Relationship Investors – Relationship Investors are people from your business acquaintances or former colleagues. This person invests in your cause to be supportive and earn something in return. You can also use their expertise in recruiting new employees or finding resources for your project to take off. These are good resources because there is a balance between emotional and financial returns here.
  • Idea Investor – This type of investor can understand and appreciate your business idea. This person usually understands your industry and target groups well and is ideal for early-stage companies. You must constantly remind these investors of your business potential and team capability. But they, in turn, can offer you better business networks and guidance whenever needed.
  • The Once Removed Investor – This investor can be an acquaintance known through a professional or personal contact. They can even be associated with a relationship or Ideal investor—their trust in your business results from their relationship with the mutual acquaintance. The intention is purely financial, and it is one of the best ways to attract more investors for your business. However, you need a relationship or idea investor to get started.
  • The Archangel Investor – An archangel investor has a proven record of successful investments in the past. They have a significant value in the business network and can offer guidance and technical support to other angel investors. They can give you access to many new once, removed investors. However, it is crucial to beware of some archangel investors who claim to help you with networking instead of investing money from their accounts.

How to become an angel investor?

To become an angel investor, you must first ensure you meet the requirements of an accredited investor.

  • An average annual income of $200,000 (for an individual investor) or $300,000 if you are a couple.
  • Have over $1 million worth of assets
  • Have a good network of entrepreneurs and accredited investors

Even if such a network of influential people is challenging to find, you must at least be able to spot startups with promising business ideas to explore. You can do this by joining communities online or becoming a member of verified investor groups.

Angel Investors Vs. Venture Capitalists

Since angel investors and venture capitalists have multiple features in common, it can be confusing for entrepreneurs to understand whom to approach for their business. An angel investor invests in a firm with his own money, whereas venture capitalists gather funds from VC firms with professional investors. Angel investors can fund early-stage companies, and the business founders should approach venture capitalists once they are past their growth stage.

While individual angel investors can contribute up to $100,000 and angel groups up to $750,000, VCs can invest up to $7 million. And most importantly, angel investments are not liable for any guidance or support other than finances; VCs focus on the growth of the company they invest in as their own and act as members of the board. Analyzing your business needs before seeking funds for your venture is essential.

Get Business Valuation for Angel Investment for Your Business!

If you are looking for angel investors to support your business, you will be required to produce a valuation report of your company. This is essential because investors need to understand the potential before they can risk their money. At Eqvista, getting an accurate valuation for your business with our advanced software is easier than ever now. Our services range from creating valuation reports to managing your cap tables promptly. Get on a discovery call with us to know more!

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