Let’s start from the definition: an angel investor is someone who invests in a new or small business venture, providing capital for start-up or expansion. Angel investors are typically individuals who have a good tolerance for risk, cash available and are looking for a higher rate of return than traditional investments and for companies aligned with tier values or interests. An angel investor return objective is usually in excess of 25 percent.
Angel investment, its most seen occurrence, takes the form of equity financing, whereby the investor’s money is exchanged for an equity position in the company. The valuation used to determine the equity share is a most important subject worthy of its own space.
Angel investors fill in the gap between the small-scale financing provided by family and friends and venture capitalists. Angel Investors can be found everywhere, however they do not advertise and flaunt, which makes it a bit tricky to locate the investor that is interested in your sector and that whose personality is right for you.
Pros and Cons
Getting funded with angel money is a bit like entering into a marriage. Like any partnerships, it has clear advantages and a few less clear disadvantages.
The big advantage is that funding from an angel investor is much more stable than debt. Angel Investors do not expect the investment to be paid back in the event of business failure. Even more importantly, most angel investors understand business and take a long-term approach and view. Furthermore, every time an angel investor decides to cut the proverbial check, they are surely investing but also looking to have a positive impact on the venture they are financing. Most angels invest in sectors that they know or that they feel a kinship with. With the funding, they also bring to the table their competence, connections and experience.
One disadvantage may be that most angel investors will want to have a say in the strategic direction of the company and in the steps that the management team intends to take to reach their goals. This may feel like a constraint only if the fit with the investor was not right from the beginning, or if the communications from the entrepreneur is not transparent.
Moreover, it is important to know and to consider what an angel investor usually looks for and whether your venture is in the position to fill those needs.