The term “angel investor” came from the United States. At the beginning of the century, this was the name given to the people who sponsored the Broadway theatrical productions of the era of enormous popularity. An angel investor is a private person who invests their own money in different kinds of businesses, usually those with excellent growth prospects (the so-called unicorn companies).
A business angel is a person who puts their money into a new business when the business is in its earliest stages of development, often in the form of an idea. Angel investors invest their money. Venture capitalists (VCs) use money from their companies or other investors to do so.
Two main points are important in this definition:
- Angel manages only his own money. It is not an intermediary who invests investors’ money entrusted to him. A business angel risks only his or her own capital.
It is the easiest and safest way for a business angel to invest their own money while at the same time being involved in the management and development of the business, it is not always easy for him or her to find the best solution.
- Angel invests when the business may not yet exist: there is only an idea, a plan for its realization, and calculations.
At this stage, the entrepreneur who came up with the idea cannot go to the bank and ask for a loan. But if you find a business angel and manage to interest him in your project, you can get a very considerable sum to start, and in addition to it – the help of an interested business angel: from consultations to drawing up a business plan and solving operational issues. This type of work requires laser-sharp focus and strategy, it’s not a gamble in the casino, hoping to win the jackpot out of luck.
Angel investors’ resources are mainly concentrated in the segment of high-tech startups. Angel investors help these projects overcome the initial stage of the life cycle and unlock their potential. The next stages are more significant funding from venture capital funds and progression to unicorn status, after which comes the key phase of development: the initial public offering on the stock exchange (IPO).
Recently, the term “business archangel” has been applied to individuals investing in revolutionary projects which have no economic payback (but do not exclude it).
- the financing does not always imply participation in the company’s capital, as in the case of VC
- the return on financing is usually not specified
- the financing aims to develop projects, some of them not for commercial gain
- The company is still at an early stage of development, with the majority of its ventures seeking to enter into a business relationship with investors
Angel investors in NYC usually get their income when they sell the startup to outside companies while the founders and managers of the business earn their pay. Sometimes they exit the company by selling a stake to the founders.
The returns vary and can be as high as 500-600% per year. But this is when selling a stake in a unicorn company. Usually, the profit is about 50-100% a year, and for one successful startup, there are usually 4-5 unprofitable, i.e., the actual profitability may be even less.
Where do business angels mainly invest?
Suppose VC choose projects depending on their payback period and prospects and can, in principle, lead any startups. In that case, angel investors prefer to invest in those enterprises that are interesting to them personally. Nevertheless, there are specific trends that are followed by the majority:
- About 30% of financing is in biotech
- another 30% in consumer goods and services
- 20% of IT companies
- 10% blockchain technology, including cryptocurrency
Where to look for business angels?
And now about where exactly you can find angel investors. First, it is worth looking for investors in your city or somewhere nearby. Business angels like to oversee things in a startup personally, so to speak, to keep their hand on the pulse.
Usually, the names of prominent investors and patrons are known. But if you are entirely new to the business, do this:
- Search the Internet
- Find groups of entrepreneurs or investors on social networks and post your proposal there
- Visit an exhibition, forum, or meeting of entrepreneurs
- Place your offer in the public domain
- Create an offer on crowdfunding exchanges
You can also apply to any angel investors association. The largest and best-known funds are:
- 37 Angels
- Empire Angels
- Golden Seeds LLC
- Tri-State Venture
- Long Island Angel Network
- ARC Angel Fund
- New York Angels
- Soundboard Foundation
How startups can grow with angel investors
Those who begin to develop a promising business project have access to both external and internal sources of funding. External sources include funds from banks and venture capital funds, grants from specialized organizations, and government aid. Domestic sources include family savings, loans from friends, and personal assets.
But often, personal funds are not enough, and traditional outside investors do not always like the startup itself or its creator, or they are not satisfied with the collected documents. Then other well-to-do individuals may come to the rescue, capable of giving the startup the impetus it needs to develop. Examples of projects that have received such financing are Facebook, PayPal, and Alibaba.
Distinguishing features of angel investors:
- They are informal and use an individual approach
- They begin financing at a very early stage of the business project’s development, which means very high risks – up to 70% of such startups do not pay off
- Because of such risks, they look for projects with a very high potential profitability – the average rate of return for the portfolio is 22%
- Angel investors are inferior to venture capital funds
- Invest personal funds in relatively small amounts relative to their capital
- Make financing decisions in a matter of days/weeks
- The venture acceleration networks have a significant impact on the company’s success
- The cycle can last up to 10 years
- They are personally interested in the project’s success; therefore, along with money, they can provide other resources: professional advice, connections, and help in finding counterparties.
Nowadays, business angels are not only individual private investors who finance promising projects through personal acquaintances. They unite in communities, research startups via the Internet, and invest funds with the help of topical resources.
Photo credit: The feature image had been done by Hay Dmitriy.