Angel Investment Meaning, features and importance

11/05/2021 0 By indiafreenotes

An angel investor is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Often, angel investors are found among an entrepreneur’s family and friends. The funds that angel investors provide may be a one-time investment to help the business get off the ground or an ongoing injection to support and carry the company through its difficult early stages.

Angel investors usually give support to start-ups at the initial moments (where risks of the start-ups failing are relatively high) and when most investors are not prepared to back them. A small but increasing number of angel investors invest online through equity crowdfunding or organize themselves into angel groups or angel networks to share investment capital, as well as to provide advice to their portfolio companies. Over the last 50 years, the number of angel investors has greatly increased.

Features

  • An angel investor is usually a high-net-worth individual who funds startups at the early stages, often with their own money.
  • Angel investing is often the primary source of funding for many startups who find it more appealing than other, more predatory, forms of funding.
  • The support that angel investors provide startups fosters innovation which translates into economic growth.
  • These types of investments are risky and usually do not represent more than 10% of the angel investor’s portfolio.

Types

  • Wealthy individuals: Depending on the business, people who have a high net worth, such as doctors, lawyers or successful business people, are often willing to invest a large sum of money in exchange for equity in a business.
  • Friends and family: This are the most common source of funding for startups and is usually where startups begin when looking for financing.
  • Groups: Many angel investors are increasingly starting to operate as part of a group. This raises the potential for the level of investment significantly.
  • Crowdfunding: This type of funding is becoming increasingly common. It involves having large groups of people invest small amounts of money online to reach a specific financial goal.

Importance of Angel Financing

  • They are more focused on the commitment and passion of the founders and the larger market opportunities that they have identified.
  • An Angel investor plays a vital role in the development of the economy by providing the risk capital which contributes to the economic growth and technological advances.
  • Early financing of the start-ups to some extent has become more dependent on angel investors, as they provide loans on relatively easier interest rates, unlike venture capital. The venture capital funds demand aggressive revenue growth quickly and are not able to accommodate a large number of small deals. The traditional source of start-up and early-stage financing-bank lending is limited due to its risk level and handling costs.
  • Further, professional angel investors look for defined exit strategy or acquisitions or initial public offerings (IPOs). Due to the least interest in giving their money back or generate any return
  • Angel investors make a prominent difference with a startup’s success as well as its failure. Most of the times, they are the first and foremost investors.
  • The effective internal rate of return for a successful portfolio investor ranges from 20% to 30%. This is beneficial for the investors and for entrepreneurs, who are the primary sources of financing. Hence makes angel investment perfect for entrepreneurs who are financially struggling during the initial phase of their business.

 Advantages

The greatest advantage of receiving funding from an angel investor is that there is less risk than if you take out a small business loan. Unlike loans, you do not have to pay back the funding from an angel investor because they receive equity in exchange for financing. Angel investors are typically experienced investors who take a long-term view and understand that they may not see a return on their investment for a long period of time. Many angel investors are also looking for personal opportunities in addition to investment opportunities.

Other benefits that a startup gets by taking on an angel investor include:

  • Credibility from being associated with the investor
  • Contacts for potential customers or employees
  • Contacts with investment bankers, accountants, lawyers and other professionals
  • Marketplace knowledge and strategies used in similar companies

Disadvantages

Higher Investor Expectations

With unlimited funds, there come higher expectations. While Angel Investors take a lot of risks while investing a boom in startups than in result, they even expect greater profits. While making an investment, anything that a businessman thinks of is profit. This will for sure keep you pressurized in order to perform well and generate greater profits.

Steady Funding Process

The funding process is quite slow and lengthy. The overall Angel Investment process takes approximately up to nine months. Foremost, finding an Angel Investor is one of the biggest tasks and takes up a huge amount of time. It is advised to make a connection that may help in finding appropriate Investors swiftly.