Angel investors can provide you with significant amounts of capital — to start-up your business venture.
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What is an angel investor?
Angel investors are individuals who provide capital for entrepreneurs and business startups — generally in exchange for a stake in the company or convertible debt. Angel investing is a type of equity finance, which contrasts with a startup loan — a form of debt finance.
Angel investors typically fund start-ups at the very beginning of their development — where risk of failure is relatively high. Like venture capital and startup accelerators — angel investing can be considered as a form of alternative business funding.
An angel investor is also known as a private investor, angel funder, business angel or seed investor.
Angel investor — considerations
Angel investors are normally high net worth individuals — that use personal funds to invest in worthy business startups. These investments result in angels taking up equity in these businesses. Angel investments are risky, and usually do not represent more than 5-10% of an angels entire investment portfolio.
As well as providing entrepreneurs with the money required to develop business ideas — angels commonly bring valuable experience and knowledge to the table.
Angels can invest alone, but they often invest in groups or networks (a syndicate). Investing in groups enables them to fund bigger projects, and lessen each angels exposure to risk. Online equity crowdfunding has become an increasingly popular way — for angels to pool capital and invest.
Every angel investor has a different appetite for risk and investments. They can provide anything from 50,000 Naira — to upwards of 5 million Naira (and above). Much bigger amounts can be invested — mainly with the help of syndication.
Angels aim to invest for the long-term — seeking positive returns on investment in a few years. They look for high potential ROI — more than what they would get from traditional investments e.g. savings accounts and treasury bills.
Due to limited access to capital markets and bank loans, angel investors are a significant source of finance — for startups and early-stage businesses. Friends and family are often the first people, to provide the funds needed to get a business up and running — while angel investment capital builds on this.
Angel investment differs to venture capital (VC) — in that angels mostly invest smaller amounts into smaller companies. Further, while some VCs primarily look for companies with rapid potential growth — angels are more concerned with taking advantage of any good market opportunity. Accordingly, angel investments can be considered as “patient capital”.
How does angel investment work?
If your business is interested in an angel investment, the best way to connect with an angel investor — is via a warm introduction. This introduction may come from a friend, contact, or family member. Warm introductions are best, as angels get many inbound pitches — so it can be difficult to stand out from the crowd.
If you don’t have someone that can refer you — it is still possible to get funding. In this case you would do some research — into individual investors, business events and pitch days. Here you would be looking for the types of investors and events — that are a good match for your business. The better the fit — the better your chances of getting funded.
Things to look for when doing investor research include — companies they’ve invested in before, what industries they work with and what their long-term goals are.
After getting in contact with an angel — you would need to pitch your case for funding. Your business pitch should clearly validate your business model — angels will want to see solid market research, realistic financial projections and an exit strategy. The key here, is to be very clear and precise — making sure to answer investor questions before they’ve even asked. Furthermore, it’s important to highlight why you think a particular investor — is a god fit for your venture.
Should an angel investor be sufficiently impressed — they may extend you an offer. This offer will typically be in the form of money — in exchange for equity in your business. Angel agreements can vary however — with some using convertible debt and/or revenue sharing.
Money may be released to you all at once, or in stages — as your reach certain milestones. In addition to providing the funds, depending on the agreement, angels might take an active role in your business — or they may sit in the background. Either way, most will be able to give you advice — as and when needed.
With any future fundraising efforts, angels are usually given the chance to invest first — before you go on to seek external funds.
Benefits of angel investment
- Can provide you with money — that others are unwilling to give
- Equity financing — no debt obligations
- Improved chances of business success — angels give both capital and expertise
- Funds can be released relatively quickly
- Flexible arrangements
Limitations of angel investment
- You lose some control of your business
- Angel investment may undervalue your business
- Can take some time before you find a suitable angel
- Average investment amounts are less than venture capital
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