Business angels give startups and small businesses the capital they need to get started. These funds are all about support. However, not all invest equally, so it is important to choose the right class of investors for your business. In this blog, we look at all you need to know about business angels.
In this blog, we will explore
- What is a business angel
- What defines a business angel
- Types of business angels
- Advantages and disadvantages of business angels
What is a Business Angel
A business angel is an individual who invests in the growth of a company.
They aim to assist entrepreneurs to thrive by investing their own money in their company ideas.
The influx of funds can help a concept evolve into a viable company and provide the platform needed to begin producing the product or service suggested. A business angel is not only interested in providing funds, but also in being involved in the business as a guide or mentor and can also invest their time and connect the entrepreneur to their broader network in order to assist them with their new business endeavour.
What defines a Business Angel
Business angels differ from other types of investors in a number of ways:
- They normally put less money into the company than a venture capitalist would.
- They have complete control over their finances.
- They invest with the anticipation of future profits, dependent on the project’s viability.
- Their main objective is to benefit from their investment.
Types of Business Angels
There are various types of business angels, each with a unique relationship to your company. They can be affiliated; which can include suppliers, customers or even competitors. They can also be nonaffiliated; which means they’re individuals without a previous connection to your company.
These business angels use severance or early-retirement income from past senior management positions at large businesses to make entrepreneurial investments. They typically seek a new senior management position in the investment industry, prefer to focus on one investment at a time, have around £1 million in cash, and invest in the £200,000 range.
Business angels who are the most engaged invest the greatest money, usually between £200,000 and £500,000. Instead of looking for new employment, they tend to have been successful entrepreneurs who are now looking for methods to diversify their portfolios or expand their present businesses.
These business angels prefer to have complete control over their investments, typically micromanaging them from a position on the board of directors rather than participating actively. They can invest in up to four businesses at once, adding value as well as money to each.
As investors with professional backgrounds (doctors, attorneys, and accountants), they prefer to invest in companies that provide a product or service with which they are familiar, and they frequently give their sector expertise to the investee company, though they are rarely involved. They typically invest in a variety of companies at the same time, ranging from £25,000 to £200,000 each, and prefer to co-invest with their peers.
Advantages of business angels
- They make quick investment decisions.
Startups sometimes face situations when they require immediate investment. However, we all know that getting finances between £10,000 and £250,000, especially in a timely manner, can be difficult. Startup owners can have access to a considerable amount of money when they need it most with the help of a business angel
- They give you access to important information and contacts.
As previously stated, a business angel not only provides funding to a business but also adds value to it. Most angel investors are seasoned investors with extensive knowledge in the industries in which they invest, which means they can also provide contacts and advice to help startups expand.
- They may be able to secure extra funding.
Venture Capitalists are actively eager to invest in startups backed by business angels, and one of the most compelling arguments in favour of doing so is that most businesses funded this way are expected to last at least four years. Furthermore, thanks to the angels’ contacts, if the business proves to be successful after a relatively short period of time, it can receive additional funding from venture capital funds.
- They boost a company’s credibility.
Business angels are often specialists in their professions who have already established a reputation by monitoring the growth of several successful businesses. This is something that startup founder may take advantage of. Working with well-known investors in a certain field might work as a catalyst, accelerating the startup’s growth dramatically.
- Their company contracts are more adaptable.
Traditional lenders may impose tight investment standards, whereas business angels are less demanding. They might be more flexible and open to recommendations because they invest their own money. Furthermore, businesses with reputable investors already in their shareholding structure might have a good impact on traditional supporters.
- They don’t shy away from high-risk ventures.
Startups are typically associated with a high level of risk, especially if they lack a proven track record of success. Business angels, on the other hand, are confident in their investments and demand a significant return to compensate for the risk.
- There is no need to pay monthly fees
Another underappreciated advantage of obtaining funds from business angels is that you don’t need to make monthly payments on your investment, such as interest rates. Because they earn a percentage of profits equal to their initial investment. This usually occurs when the founders leave the company or, at the very least, when the company starts to produce money.
Disadvantages of business angels
- Loss of complete control
The loss of complete power as a part-owner is the fundamental downside of hiring business angels. Your investor will have a say in how the company is operated and will be paid a percentage of the earnings if the company is sold.
- Higher expectations
With a high level of tolerance and risk, comes a higher level of expectation. Investors expect to see a return on their investment because they are in business to make money. Most angels will offer a return in the range of 5 to 6 years. The pressure to deliver results can be intense at times as well.
- Future profit is limited
Because you’re exchanging equity in your company as part of the deal, you’re effectively handing over a percentage of your future earnings based on the ownership stake you agreed to before.
- Don’t expect to receive follow up investment
Most investors are hesitant to spend more funds because of the risk involved in the business. However, if the company is profitable, the situation may change.
- Take longer to find a suitable business angel investor
While some angel investors are truly driven by something other than monetary gain, others are greedy and just interested in making money rather than encouraging entrepreneurs. In this instance, it is preferable to collect thorough information about the angel investor’s character and reputation before advancing.
We hope you enjoyed our article on Business Angels. Which is a crucial part of the startup culture, and they can be a big help to any startup. Follow the advice in our blog and they can help your business become a success! If you have any questions, please stay in touch with us by visiting Drop Studio