Angel investors are private individuals who typically provide the necessary capital
for small businesses in their startup phase. Many times, entrepreneurs have exhausted
all of their own personal and borrowed funds for their businesses and do not qualify
for bank loans or venture capital funding.
Angel investors make it possible for small business owners to raise capital in order
to make their productive ideas a reality. Angel investing is a large and lucrative
market, encompassing at least $30 billion per year, which is two times the amount
of the venture capital market.
Classic characteristics of an angel investor
The typical angel investor is male, with an average age of 48-59 years. He is college
educated and often times possess a graduate degree. The majority of angel investors,
about 80%, have some form of entrepreneurial and industry experience. They are often
successful self-made millionaires, with a net worth between $1 million and $10 million.
The typical angel investor can invest from $25,000 to $250,000 per deal; however,
the amounts may vary and can be much higher (anywhere from $150,000 to $1.5 million).
VCâs versus angel investors
If a venture capitalist agrees to finance an early-stage business, the new entrepreneur
will have to raise more money than needed since VCâs, on average, tend to invest
larger amounts of money (at least $500,000) per deal. In addition, the new business
owner will be bound to give up a larger stake of their company to these investors
at a much lower valuation. On the other hand, when an entrepreneur obtains funding from an angel investor, he/she will be allowed to
keep more equity and raise less capital since angel investors tend to invest smaller
amounts of money per business deal. Currently, there are more than 300,000 active
angel investors in the United States, but the potential pool is much larger since
there are millions of wealthy individuals with the discretionary net worth to make
angel investments.
Angel investment revenue
The angel investor market has an overall promising financial potential with much
risk involved. For example, through pre-IPO (or pre-initial public offering), angel
investors can dramatically increase their returns by buying stakes in a young enterprise
before the company goes public. This type of offering can be quite risky, especially
if the invested company does not perform well and/or if the company does not go
public. This is one of the many risky types of opportunities that angel investors
are aware of and is the driving force behind many of their unpredictable investments.
Many wealthy people, on the other hand, may resort to a safer alternative in investments.
By choosing to invest in stocks, treasuries, and high yield interest accounts, they
are able to avoid the financial stress and peril of losing their money in angel
investments.
Angel investor wisdom
An angel investor will not just provide the needed
capital for a new business. Their knowledge and experience in a particular
industry can greatly benefit early-stage companies, where they can mentor and provide
great insight to entrepreneurs on how to successfully develop and expand their new
businesses. It is crucial for the entrepreneur to be proactive and properly select
the right angel investor, especially those with a solid history of entrepreneurial
experience in their industry. Equally, angel investors should perform effective
due diligence practices on the new entrepreneurs, their partners, and management
team before making any financial agreement.
Additional value of angel investors
In addition to mentoring their business partners, angel investors can also help
improve an entrepreneurâs business plans. Since they play a significant role in
finding helpful solutions to propel a companyâs growth and success, they can easily
work side by side with the entrepreneur in tailoring their business plan according
to what they believe is the most effective policy.
Known for their “value events,” which can improve the overall worth of a company,
an angel investor is an important and constructive member of any team since they
have the knowledge and skills to increase a businessâ chance for success. This can
entail recruiting strategic partners and a competent management team, as well as
developing additional financial resources for later expansion. Depending on the
invested companyâs financial progress, angel investors can also actively reorganize
the company to merge, go public, or sell-out.