Angel Investors: The main reason why many startup investors consider the Startup option as the best option for funding their venture should be apparent now. Many VCs or Private equity firms prefer to fund a startup with this option. So how exactly does it work? I intend to explain how investors operate in this article.
What is Angel Investment?
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Angel investment is a private investment made in the early stages of a company by a high-net-worth individual. In the world of entrepreneurship, this is one of the most popular forms of financing. An estimated 300,000 U.S. individuals actively taking part in the angel investing scene in 2018 indicate that angel investment is critical to launching and maintaining startups. Approximately $23.1 billion was invested by this group in 2018 (up 7.4% over the previous year), and nearly 70,000 entrepreneurial ventures received funding.
Who are the Angel investors?
It is usually followed by ownership equity in the business for the high-net-worth individual. Investors who have a stake in a company are often referred to as a seed, angel, and private investors. Most often, angel investors are relatives and friends of an entrepreneur. Angel investors can make a one-time investment that jump-starts the business or provide a long-term investment that helps it succeed.
Role of Angel Investor
It gives startups a great support
It is well that they can fill the gap left by traditional lenders in terms of funding. They ask for a well-thought-out business plan, whereas traditional platforms require a long list of factors, such as profitability and familiar business models. Consequently, Angel Investment has become a highly regarded industry among new businesses.
None of the periodic payments
Unlike traditional lending platforms, Angel Investments does not require you to repay every month. Investors receive payments when a deal goes into liquidation.
Eligibility of Funding
You can receive funds regardless of what industry you choose to start a business. Angel Investors have extensive contacts across various industries, which makes them quite knowledgeable about them. Angel investors predominantly invest in technology, though other fields like consumer goods and health care are coming into play with changing times.
What is the Startup funding concept?
The startup funding concept is a straightforward one. It is not a complicated way of funding your business. Most startup investors prefer to use this method as they feel that the risk to capital is lower than any other traditional means like a stock, bonds, or mutual funds.
It would be better to put in too much money when you invest money in a company that is still in the early stages. Of course, you may want to become part-owner of the company at some point. So, as startup investors, we need to invest money into projects which have an excellent potential to earn returns in the long term.
How can an investor earn profits by investing?
The answer lies in choosing suitable projects. Since the investment money comes from various investors worldwide, you need to select projects that can earn returns for you. A fund manager plays a key role here.
Ideally, fund managers should have strong technical backgrounds. They should also be proficient in finance. And above all, they should have a sufficient understanding of the market trends.
Since risk can also be reduced by investing in less risky products, you may not know this, but the underlying assets are at risk every time you buy a stock or buy a bond. These assets may be treasury bills, bonds, government securities, and various other standard financial instruments. When you use a fund manager to invest in these assets, he reduces the risk considerably. However, there are also instances where investors may end up with zero or shallow risks in their portfolios.
When you select an asset, you should ensure that you are always getting high yields. All returns are in terms of gains and profits. Therefore, you should look for assets that have high liquidity. Liquid assets do not require much processing and do not cost a lot. It is one factor that makes an investor out of an investor and makes him a star investor.
When investing, it is best to mix your money with other assets and create a diversified portfolio. Startup investors do this by investing in various stocks, bonds, and funds as well. They make a diversified portfolio, which means that it is less exposed to any single security or any particular security or company. As a result, they can maximize the return on their investments.
Benefits of Startup investing
Startup investing is because the stock will act according to its actual value as soon as the market trends indicate its importance. It makes the stock more attractive as compared to other investment options. Once you invest in a good stock, you will never need to invest further because the returns will care for your invested extra money. Since you can earn a higher return on your startup investments, this is one of the most compelling reasons a startup investor is better than the rest.
Moreover, it does not take much money to become an excellent startup investor. You can invest in shares and bonds or even invest in the commodities like oil, gold, and gas. The beauty of investing in these assets is that they don’t change with the economic cycle. On the other hand, stock or any other commodity may lose its value due to market conditions. Even if you invest in the best supplies, it does not mean that it will always increase its value, and sometimes, it might decrease as well.
The rise and fall of many investments can indeed be predicted. However, when things happen suddenly, investors tend to be left hanging after making their investment decisions. Alternatives to investing in real estate include good stocks, which you can watch grow over time.
Features of an Angel investors
Trustful
Angel investors need to be trusted, as you don’t want someone to use privileged information from your business against you and cause problems for you and your business later. Look for a business angel who can provide you with financial assistance as well as guidance and expertise.
Skills of Decision Making
Business angels who are seasoned aren’t afraid to make decisions based on the nitty-gritty details. To show they believe in you and your vision, they will act quickly and invest in your company if they see potential in you.
What is crowdfunding?
Funding a project, a business, or a particular cause through crowdfunding involves raising money from people. Funders might donate cash as a philanthropic act, but they can also receive rewards, equity, and other incentives for raising the money.
In most crowdfunding campaigns, you will find a goal amount (some crowd funders manipulate it, but we’ll get to it), how much money has risen so far, how many people have backed the campaign, and how many days are left.
What are the sources of Angel Investors?
The term “angel investors” encompasses many angel investors, and you can find them in several different formats. Angel investments are typically made by:
- Professional Individuals
One good source is high-net-worth individuals such as businessmen, doctors, lawyers, and others prepared to provide equity in return for the investment of up to (typically) $500,000. A business partner or association such as the Chamber of Commerce often helps refer clients to others.
- Family Members
Many start-up businesses turn to this option for cash to get started, and for many, it is their only option.
Demerits of Angel Investors
Here are some of the disadvantages of Angel Investors-
- Most angel investor groups are centralized in a single geographic area, thus limiting the pool of opportunities. Others claim their group restricts their ability to diversify.
- The process of joining groups requires a lot of effort.
- Some entrepreneurs complain about receiving insufficient checks and long and time-consuming evaluation periods when working with angel groups. For startups in need of new money to stay afloat, this can be a significant issue.
How much investment does an Angel Investor make?
Entrepreneurs may receive initial fundraising funding from angel investors rather than venture capital firms since less attractive companies may not receive investment from venture capital firms.
Venture capital firms usually become interested in investing only after the startup has used the angel’s investment and experienced some growth of its own.
Typically, individuals invest between $5,000 and $150,000.
3-5 angels typically invest $100,000 to $250,000 in one round of angel investing.
Angel investments can also exceed $1 million on rare occasions.
Is it worth being Angel Investor?
There is a 0.00067% chance that the company you invest in will become worth $1 Billion. If you consider that 90% of startups fail, investing shows no promise of making money.
If an investment fails, you lose all your invested money instead of just some of it, which is the most significant risk.
Those investments that do not collapse outright could turn into zombies (i.e., companies that need continuous bailouts to operate.) These investments never reach a scale that would permit them to be profitable.
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