As the owner of a start-up company, you must have heard the term “angel investor” quite often at various corporate and networking events. But if you are not yet able to completely comprehend the meaning of it, you are not alone.
The one-liner explanation for “angel investors” would be- individuals or a group of individuals who help lift up a new business by providing them funds at a very early stage. They tend to bet on the entrepreneurs rather than the company itself.
However, this definition doesn’t end here. In this article, we will be digging deeper into the exact prerequisites that qualify someone to be known as an angel investor and how your start-up can benefit from it.
What Is An Angel Investor?
As we discussed above, a private investor who typically provides a company with its seed funding is called an “angel investor.” Coming from a wealthy background, they usually use their own money to finance small business ventures in exchange for equity or royalties. They are usually friends or family members of the entrepreneur who trust them enough to invest in their idea.
in other way, High-net-worth individuals who support small companies or entrepreneurs financially are called “angel investors” (also known as “private investors,” “seed investors,” or “angel funders”). These individuals often do so in exchange for owning stock in the startup or entrepreneur’s business.
Angel investors are frequently found among an entrepreneur’s friends and family. Angel investors may contribute one-time capital to assist a firm in getting off the ground or continue funding to help the business get through its challenging early phases.
These characteristics distinguish angel investors from venture capitalists, who prefer to invest in promising start-ups seeking to expand their operations.
Origins of Angel Investors
While the origins of angel investors are debatable, they are usually credited to Broadway theatre. Individuals with deep pockets used to provide theatrical productions with the initial funds for a smooth start. Once production began, these “angels” drew a lot of attention and generated a lot of money.
It was William Wetzel, founder of the Center for Venture Research, who first used the term “angel investor.” He was from the University of New Hampshire and completed a study on how entrepreneurs raised capital.
Who Qualifies as An Angel Investor?
The prerequisites for being an angel investor are pretty simple. All you need are finances and the will to invest in a new start-up. Anyone fitting these two criteria can be called an “angel investor.”
However, being an angel investor doesnt always earn you the status of “accredited investor,” for which one must follow specific rules before holding assets on behalf of others.
What Is the Process of Angel Investing?
Angel investors typically fill in the gap between original funding and a sizable investment from venture capitalists.
The original funding often comes from the entrepreneurs pocket itself, but its easily exhausted in turning a business idea into something tangible. This is where angel investors save the day at the “seed” or “angel” funding stage.
This is how the process of angel investment usually takes place:
- The angel investor and the owner of young companies become aware of each other via word of mouth, business conventions, industry seminars, internet business forums, referrals from professional investment organizations, or regional business events.
- Once the interests of an investor and the owner match, the investor evaluates the performance of the business so far, reviews its investment documents, and determines its potential based on the industry it is targeting.
- Then the terms of investments are discussed, along with payouts and equity percentages, the investors rights, and an eventual exit strategy for the investor. Once these terms are agreed upon, a verbal agreement is set in place.
- The deal gets finally closed, and a legal agreement is released, following which the investor releases the funds.
Sources of Angel Investing
You now know how angel investing is done, but before that, its important to understand where you can find these investors.
- Events, conferences, and corporate ceremonies are a few places you can find and connect with angel investors offline.
- LinkedIn is emerging as quite a powerful platform to build business connections. Its a great way to reach out to potential investors.
- You can also take a more traditional approach and ask your family and friends if they or anyone else they know would be interested in investing.
Whenever you reach out to a potential “angel,” make sure you have all your relevant documents and decks handy.
Angel Investors Come in a Variety of Shapes
The various types of angel investors are:
- Family and friends: This is the most typical source of startup funding, and it’s frequently the first place they look.
- Wealthy Individuals: Depending on the firm, wealthy people are frequently willing to contribute a large sum of money in return for stock in a company. Examples include physicians, engineers, and successful business professionals.
- Groups: a lot of angel investors are slowly beginning to work together as a unit, and this considerably raises the possibility of a larger investment.
- Crowdfunding: This method of financing is gaining popularity. It enables large groups of individuals to contribute modest quantities of money to assist the business in reaching a certain financing objective.
What Is the Role of an Angel Investor?
In exchange for convertible debt or equity ownership, angel investors generally fund businesses in their early phases. Many angel investors invest in businesses in similar industries to their areas of expertise. By offering strategic suggestions, they contribute to accelerating the growth of the firms. They participate actively as shareholders in the company’s annual general meetings since they frequently have significant stock ownership.
What Percentage Do Angel Investors Want?
Since there is a significant risk factor involved for the investors in these cases, considering they are providing funds during the seeding phase, they would want as much stake in your company as possible. This wont only affect their share of equity but also their involvement in key business decisions.
However, an ideal percentage to offer them would be 2025%. While you might be eager to get the funding closed as soon as possible, dont shy away from negotiating these terms. This would evidently affect the future of your startup.
Knowing your angel investor and their expectations in terms of profit sharing and involvement in decision-making is certainly a must. Its not just their money but their brains and business approach as well, which would be impacting your company.
8 Steps to Becoming an Angel Investor
Here are the steps to becoming an angel investor:
Step 1: Ensure that You Adhere to Accredited Investor Requirements
A company or organisation must have a net worth of 25 crores in order to qualify as an accredited investor if it wants to participate in publicly traded startups.
Similarly, a person must maintain a yearly gross of 50 lakh and a liquid net worth of at least 5 crores to qualify as an accredited investor. Why is this crucial? Most equity fundraising efforts target accredited investors since they are exempt from certain securities filing requirements with the central and state securities authorities.
Step 2: Angel Investment Risks
As with every investment, angel investing has certain risks and challenges that must be examined and understood for a smooth investment process. Analyze your risk tolerance to determine whether it aligns with the risks associated with angel investing as a potential Indian investor.
Step 3: Educate Yourself
The leading Indian angel network incubators and angel groups provide investor masterclasses, workshops, and seminars. It helps prospective angel investors learn how businesses are evaluated, the process for angel investing and exiting, how to find firms with growth potential, etc.
Step 4: Take Advice from Experienced Angels
To learn more about the industry, discuss it with current investors or experienced angels, and network with them to gain a clear idea of what angel investing entails. Additionally, this helps you expand your prospective angel investment network.
Step 5: Incubators and Angel Networks
To avoid typical hazards and guarantee a successful startup investing journey, you may benefit from the combined expertise of some of the top entrepreneurs, investment professionals, and current angel investors in India by joining Indian angel network incubators, angel funds, and clubs.
Step 6: Initial Investment Tactics
You must establish a few early investing plans, such as your interest in particular businesses, sectors, or projects. What are your ideal investment amount and time frame? Would you rather make investments in a big sum or over time?
Step 7: Opportunities for Investing
Go where the startups are! For example, you may get in touch with Indian angel network incubators who can assist with portfolio management and provide good exit prospects for larger returns. It will also help with selecting the best collection of sector-agnostic investments for early-stage firms.
Step 8: Initial Investment
You may make a move toward making your first investment if you have gathered sufficient knowledge and information about the fundamentals and are confident in your ability to choose the correct deals.
FAQs on Angel Investors
Lets explore some frequently asked questions related to angel investors.
Who are angel investors, and can you share examples?
Any individual having surplus wealth and investing a sizable amount in your startup at a very early stage is an angel investor. For example, Rajan Anandan (Managing Director, Sequoia Capital), Ratan Tata (Ex-Chairman, Tata Industries), and Anupam Mittal (Founder & CEO, People Group) are some of the top angel investors in India with impressive portfolios, respectively.
Is Elon Musk an angel investor?
Yes, Elon Musk has also made some angel investments, although most of them were for his own companies.
Who is the best Angel Investor?
As per businesstoday.in, Kunal Shah, founder of Cred, is the best angel investor in India.
According to betaboom.com, Marc Andreessen tops the list of angel investors in the entire world with 37 investments.
How do Angel Investors get paid?
It depends on the percentage of equity they hold and other terms of the agreement. Usually, they do not start getting the fruits of their investment until the business is up and running, yielding some profitable results. However, high risk implies a chance of earning higher profits. If the business is successful, they enjoy the benefits of the profits made against their stake.
Are Angel Investors rich?
Yes, angel investors usually have a high net worth. This is why they typically invest their own money in new businesses and startups, allowing them to afford the high-risk factors involved.
Conclusion
Make sure you have a solid business strategy in place before approaching an angel investor. Before investing in your firm, they’ll want to be certain that it has the potential to succeed.
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