What are Angel Investors?

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An angel investor (also known as a private investor, seed investor, or angel funder) is a wealthy individual who provides financial support to small businesses or entrepreneurs in exchange for ownership stock in the company. Angel investors are frequently found within an entrepreneur’s relatives and friends. Angel investors’ cash may be a one-time investment to assist the business get off the ground, or they may be a continuous injection to support and carry the company through its difficult early phases.

Understanding Angel Investors

Angel investors are individuals who aim to invest in firms in their early stages. These types of investments are hazardous and should not account for more than 10% of an angel investor’s portfolio. Most angel investors have surplus assets and are looking for a higher rate of return than regular investment alternatives deliver.

Angel investors offer better terms than traditional lenders since they typically invest in the entrepreneur beginning the business rather than the profitability of the firm. Angel investors are more concerned with assisting businesses in taking their first steps than with the potential return from the firm. Angel investors are the polar opposite of venture capitalists.

Informal investors, angel funders, private investors, seed investors, and business angels are various terms for angel investors. These are typically wealthy individuals who invest funds in businesses in exchange for ownership stock or convertible debt. Some angel investors invest through online crowdfunding platforms or join angel investor networks to pool cash.

How Much Percentage Do Angel Investors Want?

The more money an angel investor invests in your company, the greater their expectation of a higher return on investment (ROI). The expected ROI varies depending on the angel and the investment opportunity. An angel investor would expect a 30 percent return on their investment.

As part of their exit strategy, angel investors will anticipate a return on investment. This is the phase at which they sell their stock in the company to recoup their initial investment as well as any gains.

Be aware that venture capitalists will have a greater ROI expectation. Because these corporations are giving much more money, they will seek a higher percentage of earnings.

Who Qualifies as an Angel Investor?

Angel investors are typically persons who have achieved “accredited investor” status, however this is not required. The Securities and Exchange Commission (SEC) defines a “accredited investor” as someone who has a net worth of $1 million or more in assets (excluding personal homes), has earned $200k in the previous two years, or has a joint income of $300k for married couples. Being an accredited investor, on the other hand, is not the same as being an angel investor.

Essentially, these individuals have both the financial means and the desire to contribute startup investment. This is welcomed by cash-strapped entrepreneurs, who find angel investors considerably more tempting than other, exploitative types of finance.

Angel Investors vs Venture Capitalists

While both angel investors and venture capital (VC) support businesses in exchange for a stake in the company, there are fundamental variations between the two. Both tend to invest in startups, but they usually do so at various stages of the startup’s lifetime.

“An angel investor is more likely to contribute funding for an idea, whereas the bulk of VCs would prefer to see a proof of concept,” says Courtney Lawless, a venture capitalist with Philadelphia-based MoxeHub.

Another distinction is the source of finances. Angel investors are individuals who invest their own money. Managers of venture capital funds invest other people’s money in addition to their own.

Other distinctions include:

Lower funding levels. Individual angel investors typically write far smaller checks than venture capitalists, who typically write investment cheques of $2 million or more. “Those cheques are typically between $10,000 and $100,000,” says Dave Lavinsky, co-founder of Growthink, a Bend, Oregon-based startup funding source.

Angel investors are more inclined to maintain a “hands off” posture when it comes to company involvement. Venture capitalists, on the other hand, nearly invariably sit on a company’s board and are active in its operations.

Also read: Five Star Business Finance – not your typical unicorn!

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