If you keep yourself updated with happenings in the startup world, you must have heard the word ‘angel investor’ a number of times. There are a lot of conversations around whether startups should go for angel investing, what are the pros and cons of approaching angel investors and so on.
This article talks about what, how, when and more about angel investing. Read on to get it all clear!
What is an angel investor?
An angel investor is an individual who invests money in an early age startup. They have a strong belief in the founding team and the product the startup is aiming to build. The angel investor can be an individual professional like doctors, lawyers, entrepreneurs etc. Usually, they are enthusiastic and thrilled about budding entrepreneurs who are working on a product that might change the way a particular industry or sector operates.
Lastly, they are risk-taking individuals and they demand very little or no control in return for a particular investment in the company.
How does angel investing work?
Angel investing is when wealthy individuals (angel investors) provide funding to early-stage or startup companies in exchange for equity ownership or convertible debt. Angels invest smaller amounts compared to venture capitalists, but can provide valuable mentorship and connections to the company. Although angel investing is high risk, successful investments can provide significant returns on investment. Angels also benefit from tax incentives and favorable treatment of capital gains.
How much does an angel investor invest?
Usually, this amount ranges from INR 5 lakhs to INR 2 crores. At times, the amount exceeds the usually expected value. Economic experts suggest that an investor should not invest more than 5% of their overall portfolio amount in one single company. However, looking at the stability in the start-up ecosystem, many angel investors have rewritten this unwritten norm.
How can you find an angel investor?
It might sound easy to find an individual with a wealthy background and love for startups but when a founder or co-founders enter the market for funding, things usually take longer than expected. According to Ralph Kroman of WeirFoulds LLP, the typical angel investor:
- Has an income that exceeds $100,000
- Is 40 to 60 years old
- Has a net worth in excess of $1,000,000
- Has previous successful entrepreneurial experience
- Expects to hold on the investment for up to five to seven years (although some angels wish to “cash-out” after only a few years)
- Enjoys advising the entrepreneur and likes to be part of the action
- Invests up to $150,000 but may participate in a syndicate of other angel investors bringing the total investment to multiples of individual investments
- Refers deals to other private investors even if the angel has chosen not to invest
- Likes to invest in an industry with which the angel is familiar
- Sources deals through referrals
Keep this list handy if you have just started off with your idea and keep your hunting mode on almost all the time. You never know when you might come across the right investor!
Another important aspect that goes a long way at this stage is networking. We do not mean merely attending events and exchanging greetings with people. Go for constructive conversations, schedule some time with people you look up to and get their attention. There are times when one connection might help you get in touch with the right person and there, you will have your gates open.
Lastly, there are a number of online platforms that bridge the gap between the founders’ community and angel investors. Some of these are the Angel Capital Association, Gust, Lets Venture, etc. You can jump onto these platforms and look for the possible opportunities there as well!
What does an angel investor look for?
It is difficult to actually evaluate all the parameters that an angel investor looks for. However, broadly, it is the team, the problem statement and the short-term and the long-term roadmap that matters the most. Some of the questions that angel investors have on top of their mind are:
- Does the founder know their business in-depth? Or are they only making passionate & assumptive statements?
- Is the idea disruptive in nature and solving for an existing problem? How is it going to overtake the existing competitor in the market?
- Is there a planned roadmap for the next 6-12 months? If yes, how effective is it?
- Is the problem big enough to solve?
- Will the customers pay for getting their solution?
- Will it make a difference to customers, if that solution is removed from their life?
- Is there a measurable set of customers already there?
- Will there be repeat purchases?
As mentioned, these questions are generic in nature. The overall call to make an investment also varies basis the personal relationships, past experiences and so on.
Advantages of working with an angel investor
One of the biggest advantages of working with an angel investor is that they take higher risks than any other traditional institutions, like banks. There are also a few cases wherein an angel investor does not have to be paid back in case the startup fails and the product or service did not get an adoption. The best part is that usually, an angel investor is an experienced business person who has many years of experience. They bring a lot of knowledge to the table for a startup, which can boost growth for them.
Challenges of working with an angel investor
The primary disadvantage of working with angel investors is that they usually purchase a stake in the startup. Because of this, they expect a certain amount of involvement in decision making and more as the company moves forward. This, at times, leads to conflicts which might affect the entire business.
From less than 50 angel investors a decade back, the Indian startup ecosystem has now recorded angel investments from more than 2,000+ angel investors. If you have an idea that can simplify the lives of people, add value and become a part of the human ecosystem, the opportunities are limitless. Find your USP, create an outstanding pitch and go out to find your angel!
Frequently Asked Questions (FAQ)
Is Angel Investing Profitable?
Angel investing can be profitable, but it is also a high-risk investment strategy. Many startups fail, so there is a high likelihood that an angel investor may lose their entire investment. However, successful investments can provide significant returns, sometimes exceeding a 10x return on investment. While returns can take several years, and are not guaranteed, some angel investors have earned significant wealth through successful investments. Overall, angel investing can be a profitable investment strategy, but it is important to carefully consider the risks and potential rewards before investing.
How does an angel investor get paid?
Angel investors make money through a variety of methods, including equity ownership, convertible debt, or royalties. If the company succeeds, the angel investor can sell their equity stake for a profit or receive dividends. Some angel investors may also negotiate a buyout or acquisition of the company. However, if the company fails, the angel investor may lose their entire investment.
What percentage do angel investors take?
The percentage of equity that an angel investor takes in a company can vary widely and is negotiated on a case-by-case basis. Generally, the percentage of equity that an angel investor takes is determined by the amount of money they invest. The more money an investor puts in, the higher the percentage of equity they will typically receive. Angel investors typically aim for a return of at least 10 times their initial investment, so they may negotiate a larger percentage of equity in exchange for their investment.
What is an example of an angel investor?
One example of an angel investor is Peter Thiel, co-founder of PayPal and early investor in Facebook. Thiel has made several successful investments in technology companies, including Palantir, Lyft, and Airbnb. He is also the founder of Founders Fund, a venture capital firm that focuses on early-stage investments. Thiel is known for his contrarian investment strategy and willingness to take risks on unproven startups with disruptive potential.