Angel Investors are just as their name suggests – angels, at least for those who are in need of money for their business. An angel investor is typically an affluent individual who has the resources to pull up capital for a start-up. The capital is provided to the start-up in lieu of ownership equity or a convertible debt. Though a relatively new concept, in the last few years there has been a grouping and organizing of such investors. Several angel groups or angel investments networks have come up in the recent past and these groups endeavour to enable small businesses and start – ups take off. Such business angel investments networks also often pool their resources to meet the capital needs of a business.
Source of Funding
Most angel investors typically own their own funds and invest them, completely unlike venture capitalists, who pool other people’s money into a fund and then manage it professionally. Angel investments, though investing an individual’s own money, must operate as a registered entity and the money must come from a business, investment fund, trust or a limited liability company. The angel investment network is usually a registered entity that provides both venture capital and seed funding. The extent of investments, though not extremely large, is not very small either. In most cases, an angel investment network doesn’t consider making an investment which is less than at least $1 Million.
While small business are often not able to muster enough to approach angel investments, high growth start-ups turn towards these networks after they have initially pulled out their own resources. Statistically, the annual capital invested by angel investments is almost as much as that provided by venture capitalists. However, the number of companies helped by angel investments is at least ten times more than those helped by venture capitalists.
There is no fixed amount of funding that has been decided by angle investors. The range of investment can go from a few thousand pounds to millions. Angel investing also scores over venture capitalists because unlike venture capital, capital raised from angel investments is far more readily available.
Statistically, in the last few years, a major share of money invested through business angel investments, was utilized by software companies. Healthcare services and biotechnology sector sought the second largest part of the investment and finally, the remaining investments were divided equally amongst various sectors, mostly high tech.
While channelling money through an angel investment network is simple, is difficult to raise. There are many companies that receive the funding only after they have some security to show in lieu of the money raised.
Investment Profile
Angel Investments are very high risk and from future rounds of investment, there is usually a lot of dilution. The return on investment is also very high, since a lot of times start ups tend to fail. In such a case, a huge chunk of the investment of the angel investor is completely lost. Since there is such potential risk and over the years the networks have learnt from their mistakes, most angel investments would seek a venture where the business plan is sound and there is potential to return 10 times the initial investment in a period of just 5 years.
Business angel investments also prefer those businesses which have an effective exit strategy in place. These strategies could be anything from an acquisition to public offerings. Though not laid down in stone, the current best practices of angel investments suggest that the investors should ideally seek businesses that have the potential to receive returns of about 20-30 times the investment, over a period of five to seven years.
Since there is a high failure rate amongst start up businesses and a long period of holding for the returns to flow in, the internal rate of return is effectively very low for the business angel investments. To cover up for the failures and to maintain a steady return on investment, angel investments can come as extremely expensive. However, as compared to traditional sources of funding like bank loans, which usually do not entertain small businesses and start ups, angel investors are a great option.
Profile of Business Angel Investments Communities
There is a historical significance behind the term ‘angel’. Originally, the term was used to celebrate wealthy individuals who loaned money to theatre productions at Broadway. The term soon caught on by 1978, angel investors were a heard-of entity. Most angel investors are entrepreneurs or retired executives. A typical angel investor may be interested in more than money when investing their money. Some of the common desires to invest include being mentors to the new and young entrepreneurs, keeping abreast of latest developments in the field and using their own expertise for the benefit of others. Apart from the funds that they provide, business angel investments and investors can also provide valuable experience and contacts to the business venture seeking capital.
A private company may seek an investor in several different ways. The traditional way was to meet through a contact. However, in today’s time, there are other options and opportunities where investors and entrepreneurs can be brought together.