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What is Angel Financing and how does it work?

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Angel financing is a system in which individuals with high net worth provide funding to small businesses in exchange for equity in the company.

It can either be a one-time investment to start the business or over a period of time help the company during difficult times. Typically angel investors can provide funding of about $25000 to 500000. In most cases, they are the last option for a company that doesn’t qualify for bank financing or is too small to attract a venture capital (VC) firm. In most cases, angel investors are found among the founder’s friends, connections, or family.

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Before going out for the lookout for angel financing, first, determine whether it is the one for you. To help you with that choice, here we are with the advantages and disadvantages of angel financing.

Advantages:

  • Less risky:

One of the greatest aspects of angel financing is that in case your startup fails, the invested capital doesn’t need to be paid back. Most investors understand the ups and downs of a business and thus, are there for you even if your startup fails, they do not demand the aggressive returns of their funds.

  • Easier to find for small businesses:

Most banks do not provide loans to small businesses. Besides, they are not able to attract VC firms too. Here, angel financiers come to the rescue of such businesses.

  • Long-term view:

Angel investors take a long-term view of your business and may even help you to improve and grow your business over time.

  • Networking:

Most angel investors are focused on small geographical areas and thus have a valuable network that might help you during the long run of your business.

Disadvantages:

  • Loss of equity:

One of the major disadvantages of angel financing is that you lose ownership of your startup because you need to give a part of your equity to the investors.

  • Loss of control:

After finalizing a deal, most angel investors take certain matters into their own hands. Besides, if they have a major portion of equity, they can put a more experienced executive in your place thus removing you from your own business.

  • Not easy to find:

Finding a suitable angel investor is not an easy task. There are many Angel investors out there who are motivated only by money and do not take any interest and helping to grow the startup. It is an extremely crucial step to go through the earlier reputation of the angel investor before seeking funds from them.

What do angel investors look for?

Angel investors are after all investors so they too are obviously not interested in throwing their money away; they too expect a good return. Thus, before investing they look for certain aspects of a company. They are:

  • Experience or track record of founders
  • Viability of business plan
  • Whether the business is scalable
  • Existing revenue
  • Exit strategy

How does angel financing work?

Angel Financing is relatively straightforward. Angel investors may come to know about interesting startups from various networks, entrepreneurs, or other sources. After an initial screening process, they will send an invite to prospective startups asking them to pitch in their ideas. If the pitch goes well they will take a due diligence review after which will be offered a term sheet and the deal will be closed.

You should know that Angel investors do not just invest in your startup but also guide you and advise you or help build your network for the greater good of the startup.

Angel financing V/S Venture Capital Firms:

Angel Financing and venture capital may sound similar but they have a few very important distinctions that founders should keep in mind before approaching the same.

  1. Angels are individuals with a high net worth who use their own money to invest in startups whereas venture capital firms are professionally managed with a huge team working behind them.
  2. Angel investors focus on early staged businesses or small businesses whereas venture capital firms mainly focus on companies that have been in the industry for a long time.
  3. Venture capital form may require you to add a member of their firm to your board of directors. They normally don’t act as mentors. On the other hand, Angel investors act as mentors to the founder and help them with guidance and advice that would help the company in the long run.
  4. Angel investors have a friendly approach to returns while venture capital firms have a more aggressive one.
  5. Angels are more patient than venture capital firms and are more focused on the growth of the company than on quick returns.
  6. Angel investors expect a return of over 30% while venture capitalists have higher expectations for returns. Since they are investing more money, they’d want a larger percentage of profit.

Who can be an angel investor?

Anyone with a huge net worth can become an angel investor. But normally these are individuals who have gained accredited investors status. But this is not compulsory. Besides being an activated investor is not synonymous to be an angel investor.

Basically, angel investors are people who have both the resources and the desire to invest in startups and who want a greater rate of return than those provided by traditional investment opportunities. They are more focused on helping the business grow than on quick profits.

How to find an angel investor?

Now that you have decided that Angel Financing is the kind of investment that you want for your startup, you might want to know when you can find these investors. Given below are some sources for finding angel investors:

Funding is an extremely crucial step for every business and angel financing might be a great way to kickstart your startup if you’re well aware of the terms of your deal beforehand. Nevertheless finding the right choice for funding is up to you, we can just help you make the right decision.

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