Starting up a business can sometimes be very tricky especially if you do not have enough funds at hand. However, there are various ways of getting capital and one of which is from angel investors.
Who is an angel investor?
According to Seek capital, an angel investor is basically an informal, and affluent individual who agrees to fund your start-up business in exchange for either ownership equity or for convertible debt. They could be family, friends, and wealthy individuals among others.
Though it all depends on the financial capacity of your angel investor, most of the businesses funded this way usually get enough capital and end up being big firms or corporations. This is because the angel investors are usually affluent and can invest thousands and millions of dollars in the business, provided you depict a promising business future.
Angel investors and venture capitalist often confuse people, and you might find yourself going for one instead of the other. According to Patriot Software, the two are almost synonymous, except while a venture capitalist uses money from companies, corporation, firms and pension funds, an angel investor uses money from their own pocket.
How does the relationship work?
Even though angel investors could be a saving grace especially when you desperately need the capital, they also do have their own agenda, and they do not just offer help out of their good heart as the name may suggest. Some investors will request for a seat at the board of director’s table, some will agree to lay low but will take a percentage of the total stake while others will demand power in some functions within the company like the hiring of new employees, changing the business strategies and visions among others.
There is no definite definition of the relationship between the business owner and the angel investor. However, according to PocketSense, most angel investors usually want a 20-50 percent stake in the business they fund, depending on its valuation. The stake you give out also relies on your negotiation skills.
Take care not to seem too desperate when looking for the angel investors, because the more desperate you are for the funding, the higher the percentage the investor will demand.
How to attract angel investors
For an investor to lay his confidence in you and your business, he has to be confident that you can do this and that he will receive returns from his investment. You, therefore, have to impress him. There are many things you should do before approaching the angel investor. Here are three major ones.
Know your business
For you to convince an investor that you can be the next big thing, you have to know what you are doing and how beneficial it is. Revise your business over and over. To entice the investor, even more, find out how the business benefits relate to his interests.
Draft an extensive and clean business plan
What plans do you have for the business? What are your business strategies and goals? And how do you plan on achieving them? Explain all these in your business plan and convince the investor that you have your house in order.
Clean up your debts
No investor will want to invest in a business owned by an already indebt owner. Cleaning up your personal debt will also show responsibility.
Pros and cons of angel investors
With debt financing, if the business fails, you are liable, and your personal property may be taken to compensate for the investment losses. Angel investors, on the other hand, usually cut their losses and do not resort to taking properties in case the business does not return as expected.
Broad funding range
Most startup businesses with huge goals and visions usually prefer angel investors over other funding sources. This is because angel investors are often very wealthy and they can inject thousands to millions of dollars.
As explained by Forbes, for someone to be considered an angel investor, he or she has to have at least an annual net worth of $200,000. With such net worth, the angel investors can invest enough money to help the business grow big, and with determination and focus, the business can thrive so well.
Loss of full ownership