Investment is one type of addiction for regular investors; there is no limit to what and how they invest. Similarly, one kind of investment called “angel investment” is there for the high net-worth investors. Angel investing can be the ‘chicken with golden eggs’ for a lifetime if done right.
Beginners, on the other hand, have a range of concerns about the subject. And if the queries aren’t cleared, the investment can turn into an expensive hobby. Therefore, to help all the potential angel investors out, this guide provides tips on angel investment from accredited angel investors.
What is Angel Investing?
By definition, angel investing is when an investor takes risks to invest higher capital in a new private equity startup and expects a higher return. Angel investing is only seen in private companies as opposed to public limited companies.
Who is an Angel Investor? Understanding them.
There are several names for an angel investor. Sometimes they are called angel funders, business angels, informal investors, seed investors, or private investors. They are worth millions, for which they happily take the risk to invest in startups and to provide economic and financial support to those new entrepreneurs. And, of course, being an investor means having ownership equity in that business.
An angel investor’s financial funding can be one-time to give wings to the business to fly and give him a high portion of return in exchange. They do not have any formal or legal binding with the company but are simply affluent individuals who want to invest their money somewhere.
Who is Eligible to be an Angel Investor?
An angel investor is someone who has the title of ‘accredited investor.’ But being an accredited investor does not mean he is automatically an angel investor.
People get the title of accredited investors when they have a net worth above 1 million dollars, excluding their private residence. Or it can be an individual who has earned more than 200k dollars for the last two consecutive years, 300k dollars for married couples.
If these accredited investors willingly want to inject cash into a startup, they are welcome to do so. At the same time, those startups find angel investors more reliable and trustworthy for investment than others because there is a high chance of business takeover.
Why are They Called ‘Angel Investors’?
These kinds of investors are referred to as ‘angels’ because they save a newly budding cash-hungry company from getting indebted with loans. Generally, a startup is hoarded with different types of loans; simultaneously, they need more financing to operate and carry out the expenses. Investing in a startup is quite risky. At that crucial time, the investors that inject finance are called angel investors.
What Percentage of Return do Angel Investors get?
An angel investor would most likely invest in startups with a 1 to 4 million dollars starting capital, as anything above it will attract venture capitalists. Now, the return of their investment does not depend on the share they have invested but solely on the success of the company.
Therefore, the more successful the startup will be, the better return will they get. Nonetheless, an angel investor wouldn’t make more than a 20-25% return from the investment.
When Do Investors Invest?
As we have mentioned above, angel investors invest mainly at the starting phase of the company. The starting could be as early as when the business is not more than a plan only, or when the company has just started selling their service and goods.
Of course, the initial funding or startup capital is born by the entrepreneur, but angels are a company’s first investor. At this stage, even the slightest amount of funding is required for a startup as a venture capitalist wouldn’t invest here now.
What is the Role of an Angel Investor in that Company?
Unlike other investors, an angel investor’s work is not limited to investing. You may have more duties towards the company to help it grow. Although there are no exact rules and requirements for certain roles, discuss your roles and how much you can invest here with the business owner.
Some of the Roles an Angel Investor for a company can Have:
- Investor
The first role you play in that company is as an investor. However, it is not advisable to just invest, sit back, and expect miracles to happen.
- Recruiter
Startups always struggle to hire the right employees to serve any position. And of course, this can be a major drawback for which a startup may fail. As an investor, you can act as a recruiter and hire people you have known in the past for excellent work. This will also shortcut the hiring process.
- Advisor
The business’s success will earn you profit, too. If you have fresh ideas and better advice for running the business, why not become an advisor for them?
- Networker
It is known that professional angel investors have a huge web of networks; they know many people who can be the potential customers for the business. You can be the networker to supply target customers for the business for it to progress.
Disadvantages of Angel Investing
We know many positive sides of angel investing, such as huge potential returns, asset diversification, professional portfolio, networking opportunities, and much more. What about the downsides of this profession? Some of the drawbacks of angel investing are:
- Long Return Periods
Angel investing is a long-term game, so you shouldn’t expect to receive a return magically overnight or so. It may also take a few years before you get your desired return.
- Very Risky Investment
Angel investment is a kind of gamble where you need to invest money a little bit at a time. Since you are investing in a startup, you would never know when the business might have to see market failure. Angel investing is not meant for low-risk investors.
- You are Making A Journey To The Unknown
Usually, a venture capitalist or shareholders who invest in a company see many documents and statements of the company to reach a final decision. But as an angel investor, you have no information to see the state of a newly started business.
Final Thought
I hope this article was able to give you some guidance regarding angel investing. If you can afford to make an angel investment, then we would neither encourage nor discourage your choice because it is all your money. We hope you will be able to make a better decision as you now know both the positives and negatives of it.
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