An angel investor is an individual who has a relatively high net worth and is willing to provide capital for startup companies or entrepreneurs to kickstart their businesses.
Angel investors are also known as seed or private investors and typically provide important funding for startups in exchange for part of the company. Angel investors can be acquaintances or friends of the business owner. They can also be professionals in a specific industry or have experience in investments and choose to invest due to seeing potential within a startup.
These investors can provide funds as a one off payment or continue to provide the business with funding throughout the various funding rounds. Angel investors often breach the gap between the initial funding from the founders and the funding which may be acquired from venture capitalists (VCs) during a Series A or B funding round.
Businesses usually accept funding from angel investors within any of their funding rounds, from the outset of their company. They have the opportunity to invest at the very beginning or throughout the funding rounds, when they see a potential return on their capital.
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Why Accept Funding From an Angel Investor?
Typically, businesses accept funding from angel investors because they are individuals who are willing to negotiate more favourable terms than alternative lenders.
Angel investors are an alternative to venture capitalists, and inject money when the business is in the midst of it’s early funding rounds. During the early stages, businesses will often accept funding from angel investors in order to develop and progress their business and management plans.
If a startup business fails, the company is not required to repay the loan from an angel investor as they might be with alternative forms of funding. As a consequence of this, angel investors can be seen to be taking risks when they choose to invest their funds in a startup company which has yet to make much profit.
Cheaper sources of funding are not typically available from banks or other lenders when a business is at such an early stage of its development.
What Do Businesses Exchange in Return For Funding From Angel Investors?
Angel investors typically expect a high return on their investments when they inject capital into a startup company. This is because a large percentage of investments from angel investors are lost when businesses do fail. As a consequence of this, many investors search for businesses which they believe have massive potential to generate huge returns on any money which they invest.
Typically, angel investors will be looking for businesses which have the ability to return between five and ten times more than the original investment. Some angel investors are even hoping for higher returns on anything they inject into a company at the outset. This is done through an assessment of the company’s plan for initial public offering or acquisition and a defined exit strategy.
How Do Angel Investors Source Their Funding?
Angel investors use their own funds to provide capital when investing in startup companies. This is directly opposed to venture capitalists, who manage collected funds professionally.
Angel investors are not required to offer a specific amount of funding when they inject capital into a business. The amount which they offer is negotiated between the business and the investor and can vary based on a variety of factors.
Investments can range from a few thousand pounds to millions of pounds at a time, depending on the investor themselves and the potential they see within a business. Angel investors do not have to be an individual. They can be a trust or organisation who have chosen to invest based on the judgement of an individual.