For a long time, angel investors have been supporting small and medium businesses, backing them financially and giving other kinds of logistical support. With their small investments in these businesses, many entrepreneurs have been able to make it big. There are thousands of success stories all around the world which demonstrate the efficiency of the angel investing systems. Today more and more people, who have an understanding of the markets and have the money to invest, make small investments in start up companies and small businesses.
Angel investors are wealthy individuals who make high risk investments in small start ups and expect returns on their investment after only about 5-7 years. There are many successful businesses today which had started up only after receiving funds from such individual benefactors.
Though the traditional methods of funding businesses are still common, not many have regular access to it. Small businesses especially, do not get loans from venture capitalists or banks. Since these businesses do not have any collaterals, it is easy for them to feel lost without the necessary funding. Many businesses also often wane because they never receive even the seed money required to build an initial set up. It is here that the angel investors step into the picture.
Angel investors often do not require collaterals and securities for giving out loans. They meet the potential entrepreneurs and study the business plans. There are many factors that they consider before making any small investments into the business. The business plan should first be interesting and should show good potential of growth. Most investors only take this factor into consideration. There may be others who study the business model in depth and try to learn about the individuals that are planning to run it. Different investors have different expectations from their investments and therefore consider the business plans accordingly.
The level of involvement of the investor also differs greatly according to the motivation of the investor. There are those investors who simply invest their money and then get in touch with business only at the time when the exit for them has been planned, which is usually in 5-7 years. There are other investors who will want small investments returns in terms of stock options and then there are those who want a stake in the ownership or want to become a part of the board.
These terms are usually agreed upon before the business association between the investor and the entrepreneur are finalised. There is a lot of paperwork and legal considerations that occur between the meeting of the potential partners and the formation of the final contract. Since the contract is legal and binding, attorneys are usually present at such a meeting and all decisions are taken amicably.
Many feel that the investors do not only make small investments into their businesses by providing capital. What is more important than the funds is that they also provide their experience and expertise to the business. A lot of times, the investor may assume the role of a mentor. Apart from the small investments in terms of monetary help, the investors offer valuable advice and insights into the running of the business. While some entrepreneurs may find this as ‘interfering’, most entrepreneurs are young and inexperienced and they welcome such guidance. Though angel investors are largely known for making equity investments in companies, they have a lot more to offer. They not only bring in their own expertise, but also bring in their entire list of contacts and influences, which makes it easier for the small business to flourish.
Most of these investors are high profile executives or serial entrepreneurs themselves. They have earned a lot of wealth over the years and are looking to invest it in profitable ventures. However, due to their high profile, they are also usually highly networked and can help their beneficiaries in more ways than one. Such investors are also much more empathetic to a struggling entrepreneur and offer them much more than just small investments.
Angels usually pitch in about £50,000 to £5 million. They of course do not do it for free. They usually expect a 10X return on their investment and often, in order to achieve that target, they help the business in many ways. For instance, an angel investor, after making small investments in a business himself, may introduce a young entrepreneur to other influential and wealthy people, thus helping the entrepreneur to find sources for second rounds of funding. They may also use their influence to get potential customers for the services and products that the business offers.
Angels also join larger groups or consortiums which are groups of angel investors who want to pool their resources and invest larger sums of money. Such groups are usually well structured and finance many entrepreneurs simultaneously, thus increasing the odds of getting successful investments. Since such investments are very risky and small businesses tend to fold in the initial years, returns on the investments are not always guaranteed. The angel groups can therefore, together mitigate the effects of the losses.