All businesses start with a great idea and a vision. However, you can have many great ideas that potentially profitable, but if you don’t have the money to invest in your venture and help it grow, it may never come to fruition. When you find your company stalling because of a lack of financial resources, this is where an angel investor can be a turning point for your growing business or start-up.
If you’ve not heard of the term before, let’s explore what an angel investor is and how you can utilize them to grow a successful company in the future.
What is an Angel Investor?
Angel investors are entrepreneurs who, firstly, have a large amount of capital to invest. They typically seek to fund start-ups or new businesses in exchange for equity in the company. These investors are looking for higher returns than they would get through typical business ventures, such as, an ROI of 30 to 60%.
These entrepreneurs are business savvy and know how to spot a brilliant idea worth investing in. They often can give valuable insight into how to scale a start-up appropriately. Typically, companies with limited cash flow or struggling to secure funds from financial institutions will turn to angel investors to assist them. Companies then exchange a percentage of their company to the investor instead of paying money.
An angel investor is not a substitution for traditional financing but rather an option to fill in the gap when funding your start-up. They are an excellent option for companies looking to scale up quickly. Many billion-dollar companies that exist today got there by gaining assistance from angel investors. A few companies that used angel investors to gain their footing include household names like Facebook, WhatsApp, and Pinterest.
How is an Angel Investor Different Than a Venture Capitalist?
Venture capitalists and angel investors both serve the same purpose; they invest money in your company to help you succeed. However, they do have a few notable differences. An angel investor uses their own money to invest in a start-up. The rules behind angel investing require them to have a net worth of at least a million dollars and an annual income of at least $200,000 to be an actual angel investor.
Angel investors also tend to be more concerned about helping a business succeed in its infancy stage rather than turning instant profits. This makes it, so an angel investor’s terms are typically a bit more reasonable than a venture capitalist’s terms.
A venture capitalist, on the other hand, is a firm. It can also be a person who, like angel investors, provides start-up funds for small companies. This money generally comes from multiple sources from their own investment companies or corporations. These companies rarely invest their private funds. This is just another reason why angel investors are often more invested in your company’s success; they’ve placed their bets with their money.
A final thought on angel investors and venture capitalists is that their investments tend to be smaller because angel investors are funding companies with private funds. According to the SBA, angel investments are typically around $300,000, while venture capitalist investments often range in the millions.
Why Do You Want an Angel Investor and How Do Angel Investors Help Your Company?
When you seek financing from a traditional bank, you won’t get an investment company that is eager to take risks or is willing to take them with you. Especially in this post-pandemic climate, banks are hesitant to fund any business, especially ones with a higher risk involved.
Angel investors, however, are often willing to take more significant risks in hopes that they will receive more considerable gains. They understand that excellent business equates to taking risks. Another hidden benefit, depending on the investor, is repayment. If your company succeeds, they receive a much higher reward than a banking institution because they hold an equity stake in your company. Though, if your company fails, you may not have to repay the debt.
When you bring an angel investor into your business, you gain more than just financing. These types of investors do not place their money in areas they aren’t knowledgeable about or don’t share a similar interest in. According to Investopedia, 9 out of 10 start-ups fail. Angel investors know these odds and will offer strategic business advice to help you beat the odds for both of your benefits.
How Do You Attract an Angel Investor to Make an Investment?
There are many reputable ways to attract an angel investor to the table. Still, an essential tool is having an idea and a business model worth investing in, to begin with. Through networking and established platforms, it can be easy to find an angel investor. Still, you’ll need to provide them with compelling evidence that your company is ready for significant investment and can scale and multiply to offer them good ROI in the future.
What Are the Downsides to Using an Angel Investor?
The biggest downside to an angel investor is that you are trading equity and some control over your company’s success to the investor instead of standard repayment terms with a bank loan. How much equity you give to an angel investor varies significantly related to their investment. This can be concerning for start-ups who wish to keep the business decisions in-house and don’t want to share the reins. However, this is the only major drawback to obtaining this type of investment. It is outweighed by the significant advantages that come with the experience, expertise, and financial benefits of an experienced angel investor.
Fahad Alrajhi Group
Here at the Fahad Alrajhi Group, we look to foster a culture of entrepreneurship when we invest. We strive to promote education and philanthropy that will impact society with every investment we make. If you think you are ready to welcome an investor into your company, contact us today to begin walking the path to success together.