• 07Oct

    Who are Angel Investors?

    An angel investor or a business angel refers to an individual having capital and who acts as a partner in businesses, most often in startups. The reason why they are called angel investor is simple – in most of the cases, an entrepreneur doesn’t have sufficient capital to invest in his idea. Even if he has some capital, he looks for investors, who primarily are risk takers and like to invest their money in lieu of a partnership stake or just for making the business idea a success. They look for businesses based on the viability of the idea and the entrepreneurial instinct of the proposer.  In both the cases, these angel investors, or if we call them ‘wealthy individuals with idle cash’, are no less than real angels for cash-strapped entrepreneurs. They form the chain between the initial seed funders (mostly family & friends) and venture capitalists (individuals or professional investment companies investing millions of dollars). 

    The role of an angel investor

    The primary role of an angel investor is to provide funding for the business proposal. The secondary role is related to their business acumen and industry experience. Thirdly they come on board with their wide business networks. These investors are usually members of angel investor forums and thus have a wider access to finance, legal, and related business expertise and help introduce the startup companies to potential clients. Thus, an angel investor not only brings capital but also brings first-hand expertise along with networking benefits.

    Angel investors are often retired CEOs who have idle capital to invest in startups.

    Angel investors are often retired CEOs who have idle capital to invest in startups.

    Who are angel investors

    Usually they are exited entrepreneurs or retired business CEOs who have idle capital to invest in startups.  Apart from this, they can be accredited investors, too. One important difference between angel investors and other professional investors is that angels invest their own money, and the funding provided by them can be as small as $10,000 to $ 1-2 million. So, usually they are not very big investors. Their role is paramount from the perspective of new startup companies who can neither approach banks nor VCs (venture capitalists).

    US market example

    Silicon Valley is considered the hub of angel investors. It received 39% of the $7.5 billion invested in US-based companies throughout Q2 2011 out of total investments of $22.5 billion in 2011.

     Investments types

    Investments are normally in the form of buying equity share in the startup. The angel investor is one of the shareholders (can be majority or minority depending on shareholding pattern). He may or may not take active part in the management decisions but surely keeps a tight watch on the profitability of the company by providing valuable input on the strategic direction the company is taking. But before an angel investor makes an investment decision, he has to conduct a proper profitability-cum-risk analysis. Such a problem is compounded due to a large number of entrepreneurs seeking investments from angel investors. In such a scenario, the process of finding the right company to invest in is essential. To mitigate such risks, there has been a tendency on the part of angel investors to be part of angel investor forums. These forums provide consultation to prospective angel investors regarding the safety of their investment. The process of investment is largely based on screening of applications, due diligence, investment presentations by entrepreneurs, follow-up discussions, and closure.

    Angel investors are one of the crucial components of entrepreneurship paradigm. If angels really existed, then these investors can be considered as one of their manifestations on earth.

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