When in need of financial support for your business friends and family might be able to provide too little and venture capital too much funding. But for your small business angel investors can provide just the right amount. Angel investors are usually wealthy individuals who have a desire to invest in a business with a high rate of return. But they usually invest their own money, and not pooled funds as investment companies. Thus they generally have lower capital available for individual investments. But this is not a drawback when your needs are higher than what people close to you can help you with and lower than what private venture investment firms hold as a minimum threshold.
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What Are Angel Investors?
Before I give you an answer to the “how do I get angel investors for my startup?” question, you need to understand what they are.
There isn’t a clear cut angel investor definition. The term “angel investor” draws its roots from Broadway, and the practice of rich individuals to financially support play productions. In 1978 William Wetzel, an economy professor at the University of New Hampshire, coined this term to describe investors who provide seed capital to startups.
Often they are described as being informal in nature. They are a wealthy individual who invests their own funds, as opposed to investment firms that usually pool capital of many different individuals. Traditionally angel investors for startups provide capital for in their infancy, in exchange for an equity interest in the company.
Angel investing often is motivated by goodwill or philanthropic reasons, and not just an investment opportunity. That’s the reason why some specialized ones exist interested in some particular social cause, like women angel investors, or angel investors in environmental projects, and alternative energy angel investors.
Angel investors can provide more favorable conditions to startups. Especially if they are in some industry that faces specific sets of hurdles. For example, cannabis angel investors are individuals investing mainly in this industry. Also if your startup is a producer of some novelty medical device angle investors could be the sole source of financing for you. Because other types of private investors may have aversion to risks associated with such products highly burdened by regulatory requirements.
And particularly healthcare angel investors and marijuana angel investors show the most valuable characteristic of this class of investors. Willingness to personally shoulder the financial risks associated with the business model. This is even more apparent among specialized angel investors for inventions, the area which carries the most uncertainty of startup’s success.
Are Angel Investors Specialized In Various Industries?
It is not unusual for the top angel investors to actually entrepreneurs with experience in some industry in which they are today investing. For example, many music angel investors are musicians or producers themself.
There are also investors that are willing to invest only in a certain social group, such as some black angel investors or even more pronounced specifically Christian angel investors. And it is important that in your search for, for example, a fashion angel investors you don’t go knocking on the doors of an app angel investors.
What Are The Advantages Of Angel Investors?
The first and most obvious advantage is that angel investors fund businesses in the very early stages. When your business is still at the level of an idea and has no cash flow to speak of. For example, a potential independent movie production may find a film angel investors to provide funding for the very step, setting up offices and hiring needed administrative staff.
When pitching your business idea, you should have in mind that angel investors do not look to invest in a business, but rather in an entrepreneur. Other types of lenders mostly care about the profitability of some businesses. Angel investors judge the feasibility of the business idea itself, and the people behind it. This shows their willingness to invest in your idea in the most critical phase for any business, the start.
Sometimes angel investors don’t primarily look for the financial gains of their investment, but for a social impact. This most apparent among some education angel investors and agriculture angel investors, who take a very long-term view.
There are numerous additional advantages of angel investors. Because many are veterans of specific industries you can use them to tap their wealth of knowledge and connections. These can be invaluable resources while in the process of building your company’s success. In the long run, their connections can provide potential strategic partnerships that will allow your business to grow in the future.
How To Find Angel Investors?
In the world before the internet, finding out where to find angel investors was more than half of the work needed for securing the funding for a startup. Fortunately, today you can find angel investors online with ease. Back in the if you wanted to start a construction company finding a real estate angel investors meant that you already have considerable contact with potential investors. Today there are numerous angel investors websites where you can easily find from brewery angel investors to biotech angel investors.
How do you find angel investors comes down to choosing one of the many angel investors networks and browsing profiles of them individually, and pitching your idea to those that fit your needs. With the availability of many angel investors list, the question “how to get angel investors” becomes more important than how to find. With many platforms for connecting businesses and investors, today startups can pitch their ideas directly to potential investors and thus find a very convenient source of funding for their ventures.
Many online angel investors database will give you the ability to choose options such as “angel investors near me”, or even more industry-specific “sports angel investors” or “restaurant angel investors”.
But besides online resources, there are many “offline” ones. Various business incubators and angel investment conferences around the world are just some of them.
Another source of angel investment can be crowdfunding at specialized websites. Places where a business idea can attract many smaller investments, on the order of hundreds or thousands. And where individuals can invest as little as single-digit amounts.
What Percentage Do Angel Investors Want?
Angel investors in return for their capital usually request the equity stake in the business, in other words, they are providing a form of equity investment. The size of such an ownership slice varies on the size of their investment and projection of the worth of the business idea. According to some sources such a stake is most often between 10 and 20 percent.
When looking at the return-on-investment requirements there is a plethora of different angel investors. Some investors in the biotech industry look to have their initial investment increased as much as 5-10 times in the space of 5 years. While on the other hand, some will look for the annual return on investment in the lower range, between 15 and 40 percent of the original funding.
In some general terms, for angel investors, an internal rate of return around 22 percent is considered to be a characteristic of a successful investment portfolio. In other words, recouping the whole investment in space of 4-5 years is what most of the angel investors are looking to achieve.
These returns do look like an excellent outlook from an investing perspective. But may seem like very expensive financing for a nascent business. But the reality is that for businesses that look for angel investors cheaper sources of financing are not available. Banks look for investment opportunities that have already very high profit-margins, while venture capital is chasing opportunities with high potential for large profitability. Angel investors are almost by rule willing to accept the risk of losing their complete investment. And shouldering such risk comes with a price. But it also comes with a greater personnel involvement of investors with the business. And sometimes investors can demand decision-making power in the company. If the funding is substantial, it can come with a delegated representative in the management structures of the business.
Angel Investors Vs Venture Capitalists
While you are in the search for the perfect investment option that is available to your business, you may notice that both angel investors and venture capitalists are equally recommended. But these two sources of capital are unmistakable different from each other. By design, they are appropriate for different stages of business development. Both are proven and reliable sources of funding, but they have sharply different characteristics and goals. Depending on the state of development of your business, for you, one may be better than the other.
They differ in nature
The first and foremost difference between angel investors and venture capitalists is their nature.
Angel investors are private individuals. Usually, high net-worth individuals that are willing to provide financing for businesses in the very early stages. As a rule, they provide their own funds as a source of financing. For this, they are often also called “seed investors”, as they provide so-called seed investment, funds using which business ideas are transformed into companies.
Venture capitalists are more often companies or partnerships than individuals. They most often provide financing from pooled funds. Sometimes they do operate with the funds of partnership members, but more often with the funds on investors in their partnership. As such they do not risk their own money. While angel investors are always private individuals, venture capital firms can be partnerships of investment banks, pension funds, insurance companies, and individuals.
They prefer to invest at different times
There is also a big difference in the timing in the development of a business when angel investors and venture capitalists prefer to become involved. It is often said that first come angel investors, then venture capitalists, after them the private equity firms, and the banks are the last ones.
Angel investors usually provide funding in the infancy of businesses. They provide seed capital for startups which is used to get them off the ground. They often provide funding to an entrepreneur even before they start building their business, while it exists only as an idea on the paper. Most often they are interested to see that the company starts, but their primary focus is not the growth of the company.
On the other hand, venture capitalists look to invest in businesses that have very high growth potential. Companies that have already started and have transformed their ideas into marketable products, or at least are ready to commercialize it. They do look for investment opportunities that have already seen a degree of success in the market. Especially those which can be further developed and expanded. Very often they are focused on providing funds needed for a business to grow at an exponential rate.
Usually, they provide different levels of funding
Another distinction between angel investors and venture capitalists is the size of funding they are willing to provide to prospective entrepreneurs.
Angel investors, by rule, risk their own capital. Though we are talking about high net-worth individuals, we are still talking about the individuals. Thus this is a limiting factor. The general tendency of angel investors is to not expose more than 10 percent of their overall portfolio in one single investment. And so they typically invest between $25,000 and $100,000. Now, keep in mind that this is typical, not the rule. The upper limits of angle investments is considered to be around $500,000. How much capital any particular angel investor is willing to provide is also dependant on the industry in which they operate. For example, some sources cite the figure of $120,000 as average seed capital in the tech industry, and $20,000 average for the food industry.
Venture capitalists on the other hand have substantially larger funds at their disposal. Just for the fact that they are operating with pooled resources of several individuals or institutions. For this fact, they are able to provide a considerably higher level of funding. From several hundred thousand, to actually several million dollars.
When getting your business idea off the ground you certainly will find yourself in need of financial capital. But at the infancy of your business, some funding sources may not be available to you. Banks look for already established businesses as potential loan users, while venture capital companies look for businesses with market presence and a high potential for growth. So your option should be the angel investors. In short, individual investors who are willing to share with you the risks of starting up a business.