What Are Angel Investors? – Councilor Forbes

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Angel investors are people who offer financing to promising start-ups in exchange for a portion of the business, usually in the form of equity or royalties. Although the numbers vary on an annual basis, as of 2017, angel investors invested around $ 25 billion in 70,000 companies.

Angel investors may or may not be accredited investors, a classification given only to investors with very high income or net worth. With the passage of the Jumpstart Our Business Startups Act of 2012, the criteria for start-up investors were broadened to include more daily retail investors, including crowdfunding campaigns.

Getting to know angel investors

Angel investors often come from the business world, but that’s not their only point of origin. Angel investors are typically found in the following professions:

• Business professionals, such as lawyers, doctors, accountants and financial advisers, among other professions.

• C-level business leaders who have risen through the ranks and know what it takes to run a successful business.

• Small business owners and successful entrepreneurs who have already started successful businesses and know how to recognize startups with bright, profitable futures.

• Investors who make small business financing a professional hobby.

• Crowdfunding platforms that raise funds in groups, with each person investing a small amount in exchange for a small share of any profits, if the business is successful.

How angel investing works

Angel investors prefer to get involved early in a business, in the “seed” or “angel” funding phase. It could mean that the angel invests when the business only exists as an idea, or it could come when a business is already up and running.

Sometimes angel investors arrive on the scene after the first round of funding, which normally comes from the founders themselves, friends and family of the founders, or bank financing. Typically, the initial funding for the business is not substantial – it is common for founders to deploy their product or service with around $ 10,000 in initial funding.

Angel investors come in after the initial funding is in place, but usually before a business needs a larger investment from a venture capitalist. Their investment is necessary to grow a business at a critical (and usually early) stage of its development, after initial funding threatens to run out and before venture capital groups show interest in partnering with a company. promising business.

Here’s how the actual investment process goes:

• Angel investors connect with young, growing businesses through word of mouth, through business and industry seminars or conventions, through referrals from professional investment organizations, online business forums, or through referrals. local events such as chamber of commerce meetings.

• If there is a mutual interest, the angel investor will perform due diligence on the start-up by talking to the founders, reviewing business investment documents and assessing the industry targeted by the company.

• Once a verbal agreement between an angel is in place, a term sheet or contract is drawn up, with agreements on investment terms, payments or share percentages, investor rights and protections, governance and control parameters and a possible exit strategy for the angel investor.

• Once the contract is finalized, an actual legal agreement is created and signed, the transaction is formally concluded, and the investment funds are made available to the company.

Although contribution amounts vary, funding levels can be as low as $ 5,000 and as high as $ 150,000. Some angel investors come together as a syndicate and can provide funding of up to $ 1 million to some companies.

Angel investors typically do not acquire more than 25% of a company’s equity. Seasoned angel investors know that company founders should have the highest stake in their own businesses, as they also have the greatest incentive to make their businesses successful.

Angel investors vs venture capitalists

While angel investors and venture capitalists (VCs) both fund companies in exchange for a portion of the stock, there are some important differences between the two entities.

Although angel investors and VCs invest in startups, they typically invest money at different stages of the process.

“An angel investor is more likely to provide capital for an idea when the majority of VCs would like proof of concept in hand,” says Courtney Lawless, a venture capital firm at Philadelphia-based MoxeHub.

Another difference is the source of funds: Angel investors are private investors who invest their own money. Venture capitalists are professional investors who usually invest other people’s money, rather than their own money, although that doesn’t mean they never invest their own money.

Other differences include:

• Lower funding amounts. Unlike venture capitalists, who typically write finance checks of $ 2 million or more, individual angel investors typically write much smaller checks. “These checks typically cost between $ 10,000 and $ 100,000,” says Dave Lavinsky, co-founder of Growthink, a business finance provider in Bend, Ore.

• Angel investors are more likely to maintain a “hands off” policy on business involvement. Venture capitalists, on the other hand, almost always sit on the board of directors and are operationally involved in a company.

Advantages and disadvantages of angel investing

There are several reasons why emerging startups might partner with an angel investor.

Benefits of angel investors

• No obligation. Because they haven’t applied for a new line of credit, and most angel investments involve equity transactions, business owners don’t have to pay back the lender if the business goes bankrupt.

• An angel investor is usually also an entrepreneur. Angel investors often have an abundance of business knowledge and experience. “Funders who have built effective organizations themselves are especially valuable,” says Garett Polanco, a certified angel investor who has funded 29 companies.

• Less administrative work. Organizations that raise funds from angel investors are not subject to onerous investment filings with the US Security and Exchange Commission (SEC) and state regulators, which they might have to do if they decide. to hold, for example, an IPO to raise funds.

• More money on the line. When angels fund a business, they are often committed for the long haul. “They often make another injection of money later,” says Polanco.

Disadvantages of Angel Investors

• Less control. Businesses that work with angel partners may have to give up some of their business capital. Although this is normally a small amount, angel funders may decide they want to play a bigger role in business decisions.

• Success in the portfolio. Angel investors demand compensation for their funding. “It usually takes the form of equity, which could be more expensive than debt financing,” Lavinsky says.

• Potential for novice investors. A big downside to angel investing is ending up with an inexperienced angel investor offering bad advice or harassing business owners for status updates. This can especially be the case with new angel funders who invest large sums of money in a business.

How to find an angel investor

Finding angel investors is a fairly straightforward process.

Start by focusing your research on finding someone close to you geographically, as many angel investors like to take an active role in the business they are funding. “We prefer to invest in companies close to where we live,” says Polanco. “The vast majority of angel investing takes place within 50 miles of the angel investor’s home or office.”

Then target industry associations and digital platforms to find a good angel investor. You could start with these two angel organizations:

Angel Capital Association (TO THAT). ACA is the world’s largest angel advocacy association, with over 14,000 private funders and over 250 licensed angel gatherings and stages. ACA operates in the United States, Canada, South America and the Middle East.

Angel Messenger Forum (AMF). New companies seeking equity financing of $ 100,000 to $ 1 million can use the Authority to make presentations to pre-qualified private and corporate funders.

Small businesses looking for angel funding can also use social media to find good angel investment candidates. LinkedIn, in particular, can be a gateway to angel investors. Just use the search key to find angel investors operating in your area.

About William Rowan

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