Angel investors are high-net-worth individuals who offer their financial backing to startups and entrepreneurs who typically don't qualify for traditional forms of funding. The term "angel" was originally used in reference to the wealthy businessmen who backed Broadway plays during the first decades of the twentieth century. Today's angels are a key ingredient in financing small business development, not only in the U.S., but around the globe. It is vital that fledgling companies on the hunt for capital funding understand the importance of the angel investor's contribution; these business benefactors have effectively bridged the wide financing gap between "friends and family" and venture capital, that dreary-gray investment area between a few thousand dollars and $1 to $2 million.
Who are Angel Investors?
The men and women termed "angel investors" are often entrepreneurs themselves, who've achieved success in their own endeavors. They are also professionals such as doctors, lawyers and executives, and other business owners. Many feel compelled to provide not just seed money or start-up capital, but guidance, support and expertise. All of these contributions can prove invaluable to a budding business, but the knowledge shared can sometimes prove more invigorating than the cash received. Until the very recent past, individual angel investors often worked in the background, and could be difficult to find. A new trend is developing, however, and angel investors are forming groups to work together and share both resources and information, which makes it easier for entrepreneurs and small business startups to access the funding they need to get their ideas off the ground.
What is the Difference Between an Angel and a Venture Capitalist?
Although the two terms are often heard in the same sentence, there are considerable differences between angel investors and venture capital firms. While angels typically use their own funds to back a new business, venture capital usually comes from sources other than the financiers' own pockets. Venture capital firms used to be heavily involved with startups, but over the past fifteen years, they've gradually moved towards funding later stages of business development. While angel investors are willing to provide even modest amounts of growth capital, venture capitalists won't consider smaller funding needs, which, if they were relying solely on an infusion of venture capital, would leave a tremendous number of newly hatched enterprises out in the cold. Another key distinction between the two sources of capital funding is their motivation; while venture capitalists have a reputation for ruthlessness, angel investors often look beyond the numbers; the goals of a entrepreneur and the chance to mentor may well be the determining factors in an angel's decision to invest, rather than a high ROI.
What is the Dollar Impact of Angel Investors on Startups?
The funding from angel investors boosts an amazing number of American entrepreneurs; over the past decade and a half, between 30,000 and 60,000 small businesses received financial backing annually. It's estimated that, in 2010 alone, angels injected over $23 billion in capital funding into more than 60,000 companies; just a few years prior, the average dollar figure invested in an individual business was $450,000. But this average only displays part of the financing picture; angels frequently infuse anywhere from a few thousand dollars to millions, depending on the individuals involved and the needs of the new enterprise. Although it's automatic to think of technology combined with the term "startup", angel investors are actively involved across a wide range of industries, from healthcare and energy, to retail and biotech, as well as software and IT services.
How can a Small Business Find An Angel Investor?
There are really two types of angel investors; affiliated and non-affiliated. Affiliated angels are the ones young businesses already know; a potential investor could be an existing supplier or customer who understands the value of a given startup and who could benefit from its survival and growth. An employee might have access to capital from an inheritance or real estate equity and may welcome the opportunity to provide funding in return for a percentage of the company they work for. Non-affiliated angel investors are becoming increasingly easier to find. Directories and online networks are developing, and some angels actively publicize their interest in supporting the next round of business success; listings of angel groups can be found on the web. The local business community may also be a source of potential angels; an accountant or lawyer might offer excellent suggestions on where seed or growth funding could be obtained.
What Kind of Qualifications and Terms Do Angel Investors Expect?
A professional angel investor will typically complete a thorough due diligence; if an entrepreneur is considered by an angel group, a rigorous application process is the norm. One of the benefits of dealing with a group is that once a startup has passed that initial step, they will have an opportunity to present their funding needs to a larger number of potential backers. The actual ROI expected will depend on a variety of factors. The level of risk an angel takes on would play a key role, as well as the experience and skills of the entrepreneur. Ten or twenty times an original investment within five years is not unreasonable. Often, an angel will expect a seat on a young company's board, as well as input on how the business progresses. It's estimated that there are more than a quarter of a million active angel investors in the United States; given that figure and the number of startups who receive backing, it's clear that funding is available for small businesses able to meet the requirements.
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