Angel Investors are one type of accredited investors. To put in numbers they are people having a net worth of their assets close to 1 M $ or have an income of 200 K $ from past years or 300 K $ in terms of married couples. Angel investors are the most prominent sources of funding in the seed funding stage for startups.
The reason behind this is that ventures have deeper pockets and good networking in comparison to angel investors. Venture capitals don’t use their money whereas angel investors use their own money for investing purposes. Also angel investors are less predatory because they use their entire savings for funding a startup. So all they want and work for is the success of the startup.
Angel investors not only look for business opportunities but they also focus on individual opportunities. They look at having a seat in management of the company that grows multifold. Hence they give extra attention to their investment and sometimes this becomes a problem for the entrepreneurs.
Angel investor is a 4 decade old term. In 1978 it was first used by William Wetzel who is the founder of this concept as well. The concept came into notice from the production houses of theatres. Long time back the production houses borrowed money from various wealthy people for theatrical performances and once they started earning revenue returned the money with interest. Hence this pooling of money was noticed by William Wetzel and he found the angel investor idea.
Silicon valley is the hub of such investors in today’s time. Any startup’s dream is to get a silicon valley investor in their investor portfolio. In 2011 Silicon valley accounted for 41% of the entire investment into startups in the U.S.A.
In the modern era the angel investors have also adopted the online way for funding startups. There are various sites like AngelList which has a list of angel investors on it. The startups can present their pitch on the site and the interested investors would contact them for investment directly. Also there are various boot camps organised every year for startups to get their funding from such investors.
Sources of Funding
Angel investors use their own money while funding the startups. They are a form of accredited investor only. Though for funding a startup one is not required to be termed as an accredited investor. Also in some cases the angel investors create their own company or trust or business house or LLC for investing selective and limited startups.
Angel investors also represent a large part of funding to a startup’s second round of fund growing. Their funding ranges from 1K $ to millions of dollars. They usually invest their funds into technology, healthcare, energy and software industries. In the U.S.A it is necessary to get qualified as an accredited investor for being an angel investor.
Mostly their funding is individual and self centric. In many cases the angel investors also go for crowd funding methods or getting funds from wealthy houses. Nowadays Angel investors also form a syndicate together. Many investors are coming together and forming a syndicate to get the benefit of deep pockets, grabbing more opportunities, dividing the risk appetite and better networking.
Here Crowdfunding is done online. They have a portal where various small individuals can invest from 100 $ to 1000 $ to whatever they want to in various schemes. All such accumulated money is used for funding the entrepreneurs. In 2016 such platforms raised around 36 billion $ online.
Other sources of outside funding are wealthy individuals, friends and families and syndicate groups.
Famous Indian Angel Investors
|NAME||NO. OF STARTUPS FUNDED|
|Vijay Shekhar Sharma||53|
Who Are Angel Investors ?
They are basically people who are earning more than 100000 $ per year and have an asset value of approximately 1 million dollars. Also in today’s time most of them are retired doctors, lawyers, accountants who have spare money and want to invest in a tool which has high probability of better future growth. Capital market and stock markets are obviously better tools and less risky but they are not much rewarding if you have a small amount of capital to invest. Also there are banks and F.D.’s but they are not preferred due to stable and less return possibility. In case of startups the probability of return ranges from 20% – 30% annually given the fact that one picks a better company with higher growth possibility.
Possible investment profile of angel investors
Angel investors try to divert their funds as and when they get chances. The reason is that if the angel investors fail in the early stages of seed finding their entire investments will be carried away. Hence the angel investors always have an exit strategy or diverting strategy in case their investments are not being profitable after all the considerable efforts.
Angel investors catch their eyes on the IPO listings as well. They Prefer to invest in IPOs because the lot size is small and the returns are considerably high in case the IPO sails over the roof.
The ventures and angel investors take up more than 20% returns yet the startups have to reach them in case of funding. The reason is banks generally do not prefer such startups as they are a very risky bet and invest more into capital and equity markets. Hence for getting initial investments the startups have to look for a venture capitalist or an angel investor.
Famous online sites for crowdfunding are Kickstarter and Indiegogo.
Characteristics That Angel Investors Look for in Entrepreneurs
The Angel investors lookout for :
- Passion and commitment in the founders
- Potential for diversification of the company in long run
- Growth capacity in the long run
- High Intellectual property
- High market valuation and CAGR of that particular sector
- Capacity of raising additional funds in future when needed
Terms for Convertible Seed Funding
- The type of asset security is a major concern from the beginning of the investment term. In most of the cases the assets are unsecured.
- The interest rate payment terms are discussed in advance. In Many cases there are chances that the company may not pay the interest or pay the interest late due to initial beginning of the business activities.
- Discount rate is the best attraction for the investors in the startups. At the time of funding for series A round of startups the angel investors get a discount of more than 15% – 20%. The reason is their risk appetite for funding the startups from the beginning.
Venture Capital V/s Angel Investors
Hence if we look there is a very thin line of difference between angel investors and venture capitals. But in reality both of them are pretty much different from each other. The biggest difference lies in the size of the firm and individual capacity for funding. Also the portfolio of angel investors have less companies in comparison to angel investors. The venture capitals use only outside pooled money for investment but the angel investors use their own money or in some cases crowdfunding for lending money to startups.