If you’ve got a little cash burning a hole in your pocket and you’re looking for ways to get it working, you’ve probably come across the term angel investment. Or, you might have heard it in connection to getting funding for your startup.
Maybe you’re not entirely sure if it’s a road you want to go down, or you just want a better grasp on the concept. If that sounds like you, then you’re in the right place. Over the next few minutes you’ll learn everything you need to know about angel investment.
What Is Angel Investing?
Angel investing generally refers to an individual investing a portion of their own finance into a new business to help it get off the ground. Angels tend to invest in fields that they have previously worked in, or have have a deep knowledge of. This not only lets them more accurately decide which businesses are likely to succeed, but it also allows them to offer their experience, as well as with their money, to increase the likelihood of their investment paying off.
There are no rules when it comes to angel investing. The amounts involved can be as large or small as the investor likes. At the end of the day, the investor is free to do whatever they want, and strike whatever deal they like with their startup of choice.
How Is That Different From Venture Capital?
Angel investors can form groups to raise more money and diversify their investments, but they’re still far away from being called a venture capital firm. Venture capital firms tend to have far more investors, as well as dedicated board members whose sole job is to ensure the investments being made will pay off. Angels have to make those decisions by themselves, and will typically consider the capability of the management team above all else.
Since angel investors get involved with a business in the very early stages, the sums of money involved are much smaller than those which venture capital firms will deal with. But by functioning as an individual, these smaller investments can still be worthwhile. A venture capital firm has staff to pay, so any investment has to be large enough to justify everyone’s time.
Venture capital firms will go through a long vetting process where they research the company and take as much time as they need, to be confident in their investment before putting any money on the table. This process can take months. An angel investor can make a decision in a day if they want, since they don’t have a board of directors to answer to.
What’s Expected of the Angel?
As an angel investor you would obviously front cash for the business, but you might want to play a more active role if it’s in a field you’re familiar with, since it’s in your best interest to make sure it succeeds. Exactly how involved you get is a decision to be made between you and the owners of the startup, and if you want to take a backseat and offer your money alone, that’s perfectly acceptable too.
What Motivates an Angel?
Well first of all yes, the money is important. Indeed, as Angel investors are committing their own cash there are some things that they’ll demand of your business before they’ll sign off on their investment…
But that’s not all there is to it. Since angels tend to invest in fields they have experience in, it can be a way to give back, and help people who are in a position they were in a long time ago. It can be a charitable act as well as a financially sound one. It’s tough for small businesses owners and the more they succeed the better it is for the economy overall.
Some people just can’t stop working after retirement and angel investment offers a way to keep in touch with the industry they have spent so much time in, and put their connections to use in a low-stress way.
Why become an angel instead of a partner in a venture capital firm? As far as expected return on investment goes, you will see conflicting figures depending on where you’re looking. But since your personal risk is higher, the potential earnings of angel investment are also much greater.
What Are the Disadvantages of Angel Investment?
Since angel investors operate as individuals, and use their own finance, they open themselves up to significantly more risk than a typical venture capital firm does. If your investment portfolio isn’t very diverse and one of your businesses goes under, it can cause you major problems. Even if you have your money in multiple businesses, but they’re all in the same industry, you’re highly susceptible to anything that happens within that industry.
To account for these drawbacks it’s wise to limit the amount you invest, and spread your investments across at least 10 startups at a time. Chances are, over 50% of the startups you invest in will fail, so spreading your risk reduces the chance of you getting unlucky and losing out big time.
For startups, the flexibility of angel investment funding makes it exciting, but it’s also a potentially volatile way of raising capital. With little rules and a big emphasis on personal choice, there is scope for investors and companies to come to disagreements on business direction.
Now you know what angel investment is, what’s expected of the investor, and what the pro’s and con’s are compared to other forms of investment. If you’re willing to take a risk and like the idea of going back to your roots, but this time with all the experience you gained throughout your career, then angel investing might be for you.
Victoria Greene is a branding consultant and freelance writer. On her blog, VictoriaEcommerce, she shares tips on how new businesses can take the next step in their development. She is passionate about using her experience to help entrepreneurs grow their business.