Meaning, pros and cons and where to find them.
In the dynamic landscape of entrepreneurial financing, one type of investor continues to play a significant role: the angel investor.
This term may invoke images of celestial beings flying around, but in the realm of business, angel investors are anything but ethereal.
They are a tangible and often pivotal lifeline for start-ups navigating the precarious waters of initial growth stages.
An angel investor are high-net-worth individuals who provides capital for a business start-up, usually in exchange for convertible debt* or ownership equity.
This type of investor offers more than just financial backing. With a wealth of experience and a broad network of contacts, they often provide invaluable advice, mentorship, and industry connections to the entrepreneurs they support.
Angel investors do not get paid a salary.
They get paid when the company they've invested in achieves a successful exit event, such as a sale of the company, a merger, or an initial public offering (IPO). The investors sell their shares at a profit, which is their return on investment. They may also receive dividends if the company begins to generate substantial profits.
Yes, the "Dragons" on the television show "Dragon's Den" act as angel investors during the show. They are successful entrepreneurs or business people who use their own money to invest in the businesses pitched on the show, in exchange for equity.
Just like typical angel investors, they also often provide expertise, mentorship, and connections to help the businesses they invest in succeed.
Angel investors and venture capitalists (VCs) are both important players in startup financing, but they operate differently and typically get involved at different stages of a company's growth. Here's a comparison of these two types of investors:
Funding Stage: Angel investors usually provide capital during the seed or early stages of a company. They often support startups when the company is just getting off the ground and may need funding for development and initial marketing efforts.
Investment Size: Angel investments typically range from tens of thousands to a few million dollars. The amount invested depends on the individual investor's wealth and interest in the project.
Source of Funds: Angel investors invest their own personal funds.
Involvement: Angel investors may take a hands-on approach, offering mentorship and advice to the entrepreneurs they fund. However, the degree of involvement varies depending on the investor and the agreement made.
Return on Investment: Angel investors generally take equity in the company, expecting a return on their investment if the company is successful, often through an exit event like a sale or IPO.
Funding Stage: VCs typically get involved at later stages, once a business has a proven concept or has already started generating revenue. They invest during Series A funding rounds and beyond.
Investment Size: VCs invest larger sums of money, often millions or even billions of dollars, depending on the funding round and the potential of the business.
Source of Funds: VCs invest the pooled money of other people or entities. The funds come from private and public pension funds, endowment funds, foundations, corporations, and wealthy individuals.
Involvement: VCs often take an active role in companies they invest in. They may require a seat on the board of directors and have a say in major company decisions.
Return on Investment: VCs also take equity in the companies they invest in and expect a significant return on their investment, typically through an exit strategy such as an IPO or sale of the company.
Quick note: it’s true, a lot of venture capital firms only kick in at rounds over £5M, however we are seeing more and more pre-seed VCs popping up. So don’t let your early stage startup stop you from contacting VCs.
Love money refers to funds obtained from individuals who have a personal relationship with the entrepreneur - typically, friends and family. The investor's primary motivation is often emotional, driven by the desire to support the entrepreneur's dreams rather than seeking a financial return.
Ease of Access: Raising funds from friends and family can often be faster and easier than securing traditional investment. Your personal relationships can make these individuals more likely to invest based on their belief in you, even when your business is still in its early stages.
Flexible Terms: Friends and family are typically more flexible with the terms of their investment than professional investors. They might offer you a lower interest rate on a loan, be willing to make an equity investment, or even gift you the money with no strings attached.
Support and Encouragement: Friends and family members can offer more than just financial support. They can provide moral support, advice, and encouragement, which can be invaluable when you're trying to get a new business off the ground.
Limited Funds: The amount of money you can raise from friends and family is likely to be limited and may not be sufficient for long-term business needs or significant growth. It may be enough to get you started, but you'll probably need additional sources of funding as your business grows.
Strained Relationships: Money can complicate personal relationships, and this is especially true if the business fails. Friends or family members may feel resentful or disappointed if they lose their investment.
Lack of Business Guidance: Unlike angel investors or venture capitalists, your friends and family may not have the business experience to provide the guidance or connections that your company needs to succeed.
Informal Agreements: Sometimes, love money comes with informal or poorly defined agreements, which can lead to misunderstandings or disputes in the future. It's important to have clear, written agreements, just as you would with a professional investor.
With a willingness to take risks on fledgling businesses and a desire to help innovation take flight, angel investors continue to be an integral part of the start-up ecosystem, often being the difference between a venture's success and its untimely demise.