Lately, angel investing in start-ups has been on the rise. You may have heard about some companies and businesses that have gotten a leg up from angel investors. There have been many high-profile success stories like Uber, WhatsApp, and Facebook which have spurred angel investors to make multiple bets with the hopes of getting huge returns. In this article we will take an in-depth look at angel investing, from what is it, to what angel investors have to offer, and whether or not it’s right for your business.
Who Are These Angels?
Angel investors might be professionals such as doctors or lawyers, former business associates, or better yet, seasoned entrepreneurs interested in helping out the next generation of business owners. Angels need to meet the Securities Exchange Commission’s (SEC) definition of accredited investors. They each need to have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).
Basically, angel investors give you money, you sell them equity in the company, filing the investment raise with the SEC. The typical angel investment is $25,000 to $100,000 a company, but can go much higher. Most investments involve multiple investors, thanks to the proliferation of angel groups. What matters most is that these investors are wealthy and willing to give you hundreds of thousands of dollars in your business in return for a piece of the action.
Angel investments can be perfect for businesses that are established enough that they are beyond the startup phase, but are still early enough in the game that they need capital to develop a product or fund a marketing strategy.
Many businesses receiving angel investments already have some revenue, but they need some cash to kick the enterprise to the next level. Not only can an angel investor provide this, but he or she might become an important mentor. Because their money is on the line, they will be highly motivated to see your business succeed.
Although you may get a check for a few ten thousand dollars, it comes with a price. You could be giving away anywhere from 10 to more than 50 percent of your business. Angel investors want a return on their investment, and their terms for the loan may not be so desirable.
On top of that, there’s always the risk that your investors will decide that you are the business’ greatest obstacle to success, and you could get fired from the company you created. Angel investors, like venture capitalists, like to see an end game down the road that will allow them to pocket their winnings, whether it is a public offering or your business getting acquired by another company. You might have to give up running your enterprise before you’re ready to.
Raising capital through angel investors can be a very time-consuming process. It will always take longer to raise angel financing than you expect, and it will be more difficult than you had anticipated. Not only do you have to find the right investors who are interested in your business niche, but you have to go through meetings, due diligence, negotiations on terms, and more.
Top 3 Reasons Angel Investors Will Fund Your Business
If you’re looking for an angel investor to fund your business, you may want to consider exactly what the investor is looking for to improve your chances of success. Here are the top 3 reasons angel investors choose to fund your business:
- Your company’s management – Exceptional management is vital for any business. When angel investors were asked about what their number one consideration for investing in a business was, seventy five percent of survey respondents said the management team of a startup was their biggest concern. Startups are not only about the business idea but also very much about the people behind them. A compelling, experienced team that can sell the vision and the potential impact is key to success, and something savvy angels look at closely. Some qualities to have as part of a management team are integrity, clarity of strategy and approach, professionalism and determination.
- Potential ROI – Naturally, angels look for opportunities that will benefit them as well. 49 percent of angels ranked potential ROI as their top motivator for making an investment decision. While some investors are looking for financial compensation, it’s important to note that not all are primarily interested in just money. Some want a different kind of return: The ability to solve the world’s biggest challenges through the businesses they fund. Nearly one-third of angels will choose to invest in a company based on its connection to important social issues.
- The quality, passion, commitment, and integrity of the founders – The angel investor will want to get a sense of the company’s founders. They want to see that the owners are committed to the company. That they are smart, business savvy people who have a plan for things like how the company plans to market itself, the cost of acquiring a customer, and the long-term value of a customer.
At the end of the day, angel investing may seem like a God send, but in reality it’s a very risky investment tactic. The basic idea behind it is that (a) many companies would not be of interest to angels, and (b) you will be giving away ownership in your company in order to get financing. If you want to keep ownership in your company, there are many other forms of financing that can get you working capital or funds for growth without losing equity. And, of course, if your business would like to explore these options, AFP’s team is here to answer questions and help you to explore your options.