Finance

Angel Investor

Angel Investor

Angel Investors are also known as Private Investors, Seed Investors, Informal Investors, or Angel Funder. These investors provide capital to small businesses or entrepreneurs to startup their business in exchange for equity ownership in the company. They help small businesses financially. Angel investor is generally anyone from the family or friend of the entrepreneur who has a high net worth. They provide one-time funds just for the startups.

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What is Angel Investor?

The Angel Capital Association (ACA) was founded in January 2004. This is an organization from North America. The ACA also has a website that provides help to people and offers links to a local Angel Investor group. They are “ANGELS” because they invest in risky business ventures.  These investors help small-scale businesses financially at the time of startups. Angel Investors are a source of encouragement. These investors hope for a high rate of return as they take risks and they only invest in private startup companies with high-profit potential. They are generally known as the opposite of Venture Capitalist as they have higher funds and always looks for a higher rate of return than investment companies. A significant distinction between Normal Investor and Angel Investor is  “Accredited Investor” (categories defined in Rule 501). Accredited Investor is not a synonym of Angle Investor.

Requirements and Criteria to be met

  • The net worth of the Angel investor should be $1M in assets or have earned $200K in income for the previous two years, or a combined income of $300K for married.
  • The person should be well known with the risk the Angel Investor faces.
  • The Angel Investor should educate themselves well as they have now become very popular and well known.
  • Experienced Angel Investors should be consulted for any difficulties.
  • Develop an Initial Investing Strategy.
  • The investors can also join an Angel Group or Angel Platform to gain more knowledge.

Sources of Funds for Angel Investors

Angel Investors typically use their own money unlike “Venture Capitalist”. The angle investors get funds from any Limited Liability  Company, Business, Trust, or Investment Fund. The funds of angel investors range from thousands to a million dollars, depending on the nature of the business. The leading sector in terms of Angle Investor is technology, healthcare, software, etc. The net worth of the angel investor should be $1M in assets or have earned $200K in income for the previous two years, or a combined income of $300K for married.

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Risks involved for them:

According to a study conducted by IBM 90% of the startups fail in the first five years since their inception. Let us see the three main risks involved for Angel Investors.

  • Risk due to errors in judgment: A lot of times Angle Investors make judgments based on incorrect assumptions or without adequate research and study of the market.
  • Personnel Risks: when someone invests in a startup it is primarily an investment in its management and execution abilities. Hence the Angel Investor should know the business prior experience before making any angle investments.
  • Asset risk: It is very difficult to invest in a startup as it is very risky. If the business turns bankrupt or is shut down due to any reason then Angel Investors are the one who faces risk. Hence start-ups are not asset classes where the rate of return is fixed.

Example:

David ( a small businessman) gets an idea for a way to power widgets with small and flexible solar panels rather than electricity. But David has no funds to invest in and in order to capitalize on the idea he needs a strong investment. He finds his friend John ( an angel investor) who is very wealthy and is ready to invest in David’s business as he wants to see him grow and become a good businessman. So, John decides to invest $100000 in David’s business, and with this John receives 40% of the company. David starts his business and John provides his business advice and encouragement.

Final Thoughts:

Angel Investors play a very important role in the business world. Without them, it is very difficult for start-ups to start their business. They are basically the first outside who provides small businesses a start-up or a kick to start a business with so much risk with them. They go beyond the desire to make money to invest in the business. Financial investors or companies also hesitate to invest in such risky businesses or to lend money for startups or small businesses. Start-ups play an important role in promoting local business and talent and have recently become an important part of the eco-system.

 

AuthorSaachi Lodha

About the Author – A passionate professional with knowledge of Accounting and Finance and currently exploring Financial Risk Management (FRM) to gain knowledge and exposure. As a part of the FRM course also writing blogs to explore the field more and deep dive into the content.

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