Finding capital is among one of the major challenges the growing entrepreneurs face in today's world. Many startups apply for loans and grants for their business operations. However, getting loans or grants is exhausting, and one gets limited money. A study by SCORE indicates that 42% of entrepreneurs start their businesses with only existing resources like personal savings. When business owners use all their savings and exhaust funds that friends and family are willing to offer, they begin exploring other sources of capital, and angel investor is one of the most attractive sources of funding.
What Is an Angel Investor?
An angel investor refers to a wealthy investor who funds small businesses in exchange for equity. Unlike venture capitalists who invest funds on behalf of others, angels invest their capital in a company. After investing, angels are more patient with entrepreneurs compared to venture capitalists. Furthermore, an angel investor is open to offering small amounts for a longer period until the business is successful. However, angel investors want to find an exit strategy at some level where they get their profits. The exit strategy of angel investing can be an acquisition or public offering.
Many angel investors are individuals with entrepreneurial backgrounds, active or retired business executives, or founders' families and friends. Angel investment is a high risk compared to a more established company. However, angel investing has a higher potential return. Therefore, angel investors fund startup capital hoping for a significant return when the company or business becomes successful.
How Does It Work?
At the early stage of startups, business angels represent a bridge between self-funding, sourcing capital from family and friends, or getting investments from venture capitalists. Angel investors have higher net worth and broader business experiences that can help the businesses they fund. After angel investors invest in a startup and receive their equity, they assume an advisory role in an organization, promoting the business's expansion and growth.
In most cases, business angels invest in industries they are familiar with. Such trends make angel investors an excellent networking resource for startups. Angels are well-connected and refer startup funders to other investors as the business matures.
How Do Angel Investors Help Businesses?
Interest-Free Funding
Businesses get funding from angels without the requirement to pay interest. However, an angel investor seeks an ownership stake in the company after investing. Typically, ownership stake range from 10% to 30%. When the business thrives, an angel investor reaps more. However, if the company fails, angels don't get back their investment money. The more capital angels invest into a business, the more money they demand.
Angels Bring Valuable Knowledge to a Business
Angels get a stake in a company or business and work to see the business succeed. Therefore, the role of an angel investor goes beyond offering capital to mentorship. Many angel investors in India are seasoned investors and provide expert support, guidance, and connections to a company. Experiences, resources, and insights of an angel investor into a business promote the growth and expansion of ventures.
Angels Enhance Business Discipline through Scrutiny
Business angels conduct thorough scrutiny before and after investing. Angel investors are cautious and keen not to lose their money. Business owners have to make sound business decisions to avoid losing angel funding and other support. Therefore, through external scrutiny, angels help to promote business discipline.
Flexible Financial Backing
Angel investors spend their wealth to fund businesses, which makes them negotiable. Startups or entrepreneurs can get a small amount of money from angels at different stages of the company. The risk-taking ability and funding flexibility of angel investors make them the best funding source for startups.
How to Get an Angel Investor?
Adequate Networking
Often, angels don't come on their own at the early stages of a startup. Business owners have to work hard to connect with angel investors. In most instances, startups link up with angel investors through referrals. Professional connections are a practical road to getting an angel investor. Therefore, business owners need to network to maximize the chances of finding interested financiers.
Angel investors in India have local angel events that take place periodically. Startups that attend such events have a high chance of landing a potential investor. Reaching out to other business owners who might know interested angels can help to get one.
Specific-industrial groups exist on social media platforms. Business owners are more likely to connect with investors by joining such social media groups. However, joining the groups is not enough to get financiers. Startup founders should remain active in social groups and connect with like-minded entrepreneurs who can link with angel investors.
Researching Enough on Angel Investors to Connect with
Making thorough research on potential financiers, their history, and credentials help to get one quickly. Business owners should only meet angel investors in a timely manner. Many angels have their process for getting startups that want to offer capital. Business owners need to take time and see who an angel investor has funded before, the kind of capital they offer, and their areas of expertise. A firm grasp of what an investor wants to hear increases the chances of winning them.
Having a Ready, Concise, Effective, and Thoughtful Pitch
Startup founders can meet with potential investors at networking events or professional functions. In such situations, having a well-crafted elevator pitch that conveys a quick, concise and informative business message helps to win financiers. An elevator pitch should have the company's information, like what it does, its unique position, and its growth potential.
Maintaining Active Communication Lines with Potential Investors Contacted
Business owners need to have an accessible and active line of communication with the angel investors they contact. Many angels a business reaches for financing will not offer cash after a single communication. That happens because an angel investor has to do thorough research to understand the business before giving out funds. Therefore, investors need to reach the startup founder for a deal when they decide. With an active line of communication, the startup can take advantage of the opportunity of getting a financier.
In summary, Angel investors typically invest in companies in the early stages of development with high growth potential. They are often willing to take more risks than traditional venture capitalists. Angel investors provide much-needed capital to small businesses and help them to grow and succeed after getting their stake. It is essential to understand the angel investor meaning of how angel investing works before investing.
FAQs:
What percentage does an angel investor expect to get after offering financial support to a business?
The amount of stake a financier expects varies based on the capital they give. However, many angel investors will ask for 10% to 30% of the profit from a business.
Is angel investing a profitable venture?
An angel investor can make a lot of money by financing startups. However, angel investing is risky since an investor loses the money once the business fails. Therefore, an angel must vet the startup leadership and thoroughly study a company before offering capital.
Where can a business owner find angel investors?
Angles are on the social media platforms like Facebook, Snapchat, and LinkedIn. In addition, angel investors conduct events periodically, and business owners can attend such events to connect with investors. Networking with like-minded business owners can help to find a suitable financier.
What do potential angel investors look for before financing a startup
- They will look for the experience, skill, and expertise of the management team/founders
- An angel investor also checks the business potential and returns
- They seek to know the business's early momentum
- They would also want to know about a viable exit strategy
- Another thing an angel investor would like to know is what makes your services or products unique.