The scope of angel investment has accelerated in recent years. This is so because a growing number of individuals pursue better returns on their investments than they would get from conventional investment vehicles. Angel investors have become a primary source of funding for many entrepreneurs, as well as a vital part of existence for many start-ups. This article aims to familiarize you with the concept of angel investment.
Angel investment – meaning
A start-up does not receive financing from banks and big financial institutions in the initial phase of its operations given the firm’s zero credit history. As a result, some innovative steps include raising start-up finance from non-bank sources. Examples of these may be personal financing, credit cards, vendor financing, and trade credit, factoring accounts receivables, and venture capital. Angel investment is one such primary sources of funding for newly formed entities.
It is a form of equity-financing and angel investors are regarded as sympathetic financiers. They are called angel investors as they are probably sent by the heavens to fulfill the needs of deserving business start-ups.
Angel investors – Who they are?
Angel investors are individuals who invest their capital, in return for an equity stake, in high potential start-ups. Also called informal investors, angel funders, private investors, seed investors, or accredited investors, angel investors aid in providing start-up finance particularly in the early stages. They are wealthy individuals who funnel capital to emerging start-ups in exchange for equity ownership or convertible debt.
Angel investors are high net worth individuals (HNIs) who offer a one-time financial investment to help businesses get off the ground and start carrying on their activities in the initial difficult stages.
What are the features of angel investment?
A few distinctive features of angel investment are:
- Because angel investors are most often individuals that have held executive positions at big corporations, they can provide excellent business advice to the entrepreneur, in addition to the funds.
- Angel investment tends to be a high-risk investment. This is why it normally does not represent over 10% of the investment portfolio of any given investor.
- Angel investors may either inject a one-time investment or provide ongoing capital support to help budding enterprises propel their operations.
- Most often, angel investors are found among an entrepreneur’s acquaintances.
- Angel investors invest in entrepreneurs taking their first steps in business unlike the majority of the investors who invest in already profitable businesses.
- As a way to protect their investment, angel investors take an active part in the management of the new business.
- The funds of such an investment may come from an individual, HNI, limited liability company, business, trust, or investment fund.
At which stage does angel investment take place?
Angel investors mostly come into the picture during the second stage (pre-seed or idea stage) of start-up financing, i.e., after raising funds from family and friends.
Angel investment takes place typically at the seed stage of a start-up. This is the stage where you have a sample design ready for your start-up, and you need to validate the potential demand for the product/service of your start-up. Also, it is called the first official equity funding stage for start-ups. It is not unusual for such rounds to deliver anywhere between $10,000 and $1 million for a start-up in question, depending upon the nature of the business.
How does angel investment work?
Before finalizing an investment deal, angel networks look at the previous financial actions of the company and the credentials of the staff, and their history. This due diligence is intended to ensure that the statements of the company regarding the development and market statistics can be checked as well as to ensure that any questionable practices can be detected by the investor in advance.
Angel investors would like to undertake investment in a project only if future cash inflows are likely to be more than the present cash outflows. For computing expected IRR, the risk associated with the business proposal, the length of time their money will be tied up, etc. are taken into consideration.
To improve their chances of getting the investment back, angel investors consider the following aspects for evaluating a business proposal:
- Team strength
- Background and experiences of co-founders
- Innovative product and clarity on why the solution or innovation is needed in the first place
- Business Model and a viable idea
- Revenue-generating potential
- Leadership Ability of the founder/CEO and focus
- Market Sizing of the product or service which the start-up intends to produce or render
- Progress achieved till date along with proofs
- Current and prospective competitors and what differentiates your business from them
- Main financial highlights covering sales, operating expenses, profit margins, capital spending, and growth expenses for the next 3-4 years
- How much money is proposed to be raised by the company and what will it be used for?
- The valuation that the founders have in mind, the stake that the angel investors will own
- Existing equity holding and the previous investment rounds, if any
- The capitalization table (list of shareholders, how much of the company they own, and the amount they have invested)
- Exit options (buyback or sale through IPO or sale to third party investors)
- A reasonable cash burn rate (measure related to how fast a company spends its available supply of cash). If businesses burn cash too quickly, they bear the risk of running out of money and going out of business.
- Existing technology used and any technical collaboration agreements
How to find angel investors?
There are many different ways to find angel investors for your start-up. Some of these may be:
- Liaison with entrepreneurs
- Through colleagues or friends
- Lawyers and accountants
- Referrals, local attorneys, and commerce associations
- Angel investment network (a group that combines potential individual investors)
- Venture capitalists
- Investment bankers
- Crowdfunding sites such as Kickstarter and Indiegogo
The leading sectors where angel investments are predominantly seen are technology, food, healthcare, software, biotech, and energy industries.
Angel investment in India
Some of the examples of angel investors in India are Indian Angel Network, Jito Angel Network, Stanford Angels, Mumbai Angels, Sandeep Tandon, Lead Angels, Chennai Angels, Rajan Anandan, Ritesh Malik, Sharad Sharma, T.V. Mohandas Pai, Kunal Bahl, Anupam Mittal, Zishaan Hayath, Kris Gopalakrishnan, Binny Bansal, Girish Mathrubootham, Mekin Maheshwari, Anand Chandrasekaran, etc.
Angel investors usually extend their support to start-ups at the initial times when most investors resist to back them. The support that angel investors render to start-ups spurs innovation which translates into economic growth.
Hope the information provided in this article proves helpful to you!