Over the past five decades, the trend of angel investing in businesses has grown tremendously. In regions with many early-stage businesses, the elite class is aware of the option to consider angel investing for productive use of their money.
What is Angel Investing?
Angel investing is the act of putting money into an early-stage business or a startup firm to provide crowdfunding and capital for its expansion. In exchange, the angel investor gets equity in the company.
Angel investors are also known as accredited investors. They are individuals with a high net worth. According to the SEC (Security and Exchange Commission), angel investors are categorized by a net worth of a million dollars or more in assets. Businesses that are not yet established and have insufficient cash flow often use angel investing for survival and growth. These businesses need the cash infusions that come from angel investors, which enable them to build a profitable stream of income for running their operations.
How Angel Investing Works
You might think that angel investors always have a set budget to contribute to growing businesses. But that’s not true. Investment amounts can range from a few hundred dollars to a few million bucks. Studies have revealed that angel investing is directly related to a higher survival rate for new businesses.
Let’s take a closer look at how angel investing works. The process comprises the following steps.
1. Angel Investors Identify Opportunities to Invest
Angel investors lean into startup firms that revolve around consumer products, telecommunications, healthcare, utilities, and electronics. They then develop their entry points to exciting business initiatives and build their reputation in the community of founders. Once they are established as successful and trustworthy investors, they start participating in investment deals.
2. Screening Process
The participating angel investors go through a screening process. They filter the companies they feel interested in working with and select based on the expected returns on their investment. They seek to get higher returns through angel investing than they typically would from other traditional investment forms.
3. Startups Pitch Potential Angel Investors
Most angel investors need to know the team leading a business before investing in it. That’s where the business pitch comes in. The entrepreneurs give a brief overview of their business initiative and sell their business idea. The business can make the pitch in an informal lunch or an official presentation. The angel investing process can be fun and thrilling if both parties begin to click and agree with each other.
4. Angel Investors Review the Pitch
Once the pitching sessions are over, the angel investors sit down, review and discuss each business idea presented to them. They review all the pertinent information given to them, including any presentation material, financing details, and operational procedures. They ask follow-up questions to clarify the details further. This allows them to anticipate any challenges they might face in angel investing and becoming a stakeholder in the other party’s company. Once they come across the most suitable and profitable business model, they prepare a final checklist of the issues they need to address.
5. Both Parties Agree to the Terms
If both parties foresee a deal shaping up successfully, the angel group manager connects the entrepreneur with the angel investor. Points like the deal structure, deal flow, and valuation are discussed. The goal is to negotiate a mutually beneficial set of terms and document them in the form of an agreement. A non-binding document is prepared that outlines the major components of the deal, and a diligence report is built. This is not the final stage of angel investing, but it is critical.
6. Closing the Deal
This is the final stage of angel investing. Lawyers draft the definitive legal documents before any finances are exchanged. Preparation of legal documents typically takes one to two weeks. Once both parties sign the agreement, the closing package is ready, and mentorship begins. The angel investors can offer board advice in exchange for their funding. The business operations begin accordingly.
Importance of Angel Investing
One big advantage of angel investing is that it is a lot less risky than debt financing. When you get a loan, you need to pay it back. But invested capital does not have to be paid back. It is paid back in other ways, such as by giving shares to the angel investor in your company. Most angel investors are more interested in understanding the business idea and making it work. They have a longer-term approach to their investment. They want a more concrete return on their investment instead of asking for the money back if the business fails. This makes angel investing a win-win situation for both parties.
Here are a few other benefits of angel investing.
1. Angel Investment Decisions Are Made Quickly
New businesses often go through situations when they need an urgent cash infusion. But it is usually difficult for them to get funds in the amounts they need quickly. That’s where the role of angel investing comes in. Angel investing makes it possible for such startup founders to gain access to significant funds quicker than any other way.
2. Angel Investing Provides Access to Necessary Knowledge
An angel investor infuses a business with capital and provides value to it in other forms. It gives guidance to the entrepreneur on how to grow the business with the limited cash flow the business has. Angel investors typically have large networks and can introduce the entrepreneurs they work within those networks. This further supports the growth of the startup firms and provides them with capital and cash flow.
A significant advantage of angel investing is that it does not require you to pay interest. It has a different approach from that of financial institutions. The angel investors do not ask for interest. They ask for an equity stake in the company instead. They usually get 10% of the company’s shares. If the company can achieve its forecasted growth, both parties make money and enjoy the benefits of growth. If the business fails, the angel investor does not claim their money back.
Once a company can get angel investing, it gets access to additional sources of funding that can contribute to future cash infusions to sustain the business growth. Venture capitalists are usually looking for firms already backed by angel investors. This is because most companies that support at least one angel investor are likely to survive for at least three to four years. Within this period, if the startup becomes successful, it becomes easier to raise more funds through financing from venture capitalists.
5. It Adds Credibility to the Business
Angel investors make the company they invest in look good. A startup that an angel investor backs has a good reputation in the business community, allowing it to quickly build a positive brand image. Customers and investors like to work with businesses already trusted by other large entities. Getting angel investing thus acts as a catalyst to facilitate a firm’s growth and build its brand awareness.
Angel investors are betting their money on new businesses. They select those businesses to invest in to feel closer to their heart. They can see the bigger picture. Their ultimate goal is to benefit the local community through their angel investing. They know that if the company they invest in grows, it will create new employment opportunities and stimulate economic growth. They are focused not only on their financial gain but also on the entire community’s benefit.
Attracting Angel Investors to Your Business
If you have started a business and are looking for an appropriate funding source, you can also consider angel investing, to begin with. But to attract an angel investor, you would need to take specific steps to make your pitch worthwhile.
The first and foremost thing you need is to build a professional website to showcase your business. It does not have to be a complicated and comprehensive site. Even a simple, one-page website would do, as long as it is user-friendly, easy to navigate, appealing to browse through, and provides basic information about your business.
The quickest and most cost-effective way to have a website like this is to build it on Strikingly. Strikingly is a website builder that offers tools and features for non-programmers to create attractive websites on their own. The website will serve as a one-stop platform to represent your business initiative. You can revise or update your website content any time you want, with the help of the Strikingly editor interface. We have a drag and drop interface that allows you to add content to your web pages and customize the layout without writing any code.
Once you have a professional-looking website, it will be easier for you to pitch your business idea to access angel investing and other valuable funding sources.