Learn All About Angel Investment

Learn what is angel investment, its features, what angel investors do and the risk associated with investments in early stages of businesses.

Multiple business accelerators focus on supporting early-stage entrepreneurs, more popularly called “Startups“. However, the blind spot of the national ecosystem is the lack of support these same entrepreneurs have when their business grows. That is where angel investment networks play a fundamental role.

Angel investment is focused on supporting startups at an early stage. It continues to be a new concept accompanied by widespread misinformation. There is still much work to be done to educate investors and startups to understand their roles to get the most out of it. Angel investment networks are strategic partners that make their experience and contact networks available, in addition to providing capital, so that entrepreneurs can reach their next level of development. In the article, we will learn about angel investment.

Explore Investing Courses

Content

• What is Angel Investment?
• Types of Angel Investment
• Who is an Angel Investor?
• What Does an Angel Investor Do?
• How Risky Are Angel Investments?

Must Read – What is Finance?

What is Angel Investment?

Angel Investment Definition – Angel investment is a type of capital investment made by high-net-worth individuals in startups or companies in the early stages of their life cycle in exchange for a shareholding. 

Angel investment does not pay dividends or distribute profits; rather, the bet is to acquire a stake in the business. These investments are considered very high risk, with the expected returns usually very high. 

To mitigate this risk to investors, ventures usually structure the capital raising processes in several rounds. This demonstrates milestones and advances that increase the attractiveness and potential of the business.

Must Read – Angel Investors vs Venture Capitalists – Know the Differences

Types of Angel Investment

There are a variety of angel investment options available to startup entrepreneurs. Angel investment is a venture capital investment where investors provide money to startups in exchange for a percentage of their sales.

There are two types of an angel investment: direct and indirect. 

Direct Investments – Angel investors themselves make direct angel investments. 

Direct angel investments come with a higher upfront investment than indirect angel investments. Angel investors often invest in a specific company or project rather than multiple startups.

Indirect Investments – In contrast, indirect angel investments come from companies that want to invest in a startup but need more resources to invest in it directly. These investments are much riskier and require more time and resources to succeed. Indirect angel investors may have a different level of expertise than direct angels. They also may have different commitments to the project.

Who is an Angel Investor?

An Angel investor is a person who invests his own money in startups and companies with high growth potential. An angel investor, apart from money, brings in extensive experience and knowldge. Sometimes they have a minority stake in the company (5 – 10%) and rarely hold executive positions.

They have a more objective vision of the business. Their network of contacts and high-level resources, such as access to experts from different business areas and potential partners, can be extremely useful for new businesses.

An angel is not an investor who goes around distributing money. On the contrary, he chooses carefully and demands seriousness from those who request support. Access to Angel Investors is a key element for developing an entrepreneurial ecosystem. 

Angel investors prefer investing in the very early stages of the business. Though they have the option to invest in much more consolidated stages of the business. We have Venture Capital or risk capital for investments in more consolidated stages.

The angel investment stage presents some particular characteristics:

• The venture has managed to validate the business idea
• The amounts cannot be covered by earlier sources such as family and friends
• The stage of development could be more interesting for VC funds looking for slightly more mature ventures.

What Does an Angel Investor Do?

Angel investors are the key connection to entering the entrepreneurial ecosystem of a sector. The major tasks of an angel investor include – 

Investing capital

As we already mentioned, the angel investor is the one who makes a considerable contribution of money to an emerging company that is in the seed stage, which is where the idea is developed. It has to be proven that the business model is profitable.

Providing Advice

Since he has vast experience in the business area, this investor helps entrepreneurs clarify doubts regarding business management and becomes a mentor or project guide. It is a cordial relationship and a win-win for both parties.

Sharing Network of Contacts

With their career in the business world, the investor also has a list of important contacts for developing a local or international business. If an extra boost is needed at any time, this will greatly help a growing business and even serve to obtain future financing for the venture.

Reducing Risks for the Business

A startup in the seed phase has more expenses and operating costs than the income it will generate. Market experts also call it the Death Valley Curve. So an angel investor provides financial support during this crucial period for the business to move on to the next growth stage.

With the support of an angel partner, a startup company is more likely to become a profitable model and not fail along the way. Once the equilibrium point (break-even) has been reached, where there is a balance between the output and input of resources, it is when venture capitalists invest, manage third-party funds, and promote a business.

How Risky Are Angel Investments?

Highly risky. 

Given the risk profile of the investments, it is recommended that no more than 5%-10% of the assets be invested in startups. Angel investors are advised not to invest amounts that may affect their financial stability. 

Although it is a great opportunity to invest in one of the companies that look promising, these investments should be thought of more as bets that could bring great returns in the future, but it should be kept in mind that they do not have any guarantee.

Top Trending Finance Articles:

Financial Analyst Interview Questions | Accounting Interview Questions | IFRS Certification | CPA Exams | What is Inflation | What is NFT | Common Finance Terms | 50-30-20 Budget Rule | Concept of Compounding | Credit Cards Rewards System | Smart Budgeting Approaches