What is a business angel? Definition and meaning
A business angel, also called an angel investor, is a wealthy, entrepreneurial person who invests his or her personal capital in start-up companies in return for an equity stake (a percentage ownership of the business).
Most business angels will expect their investment to give them a good return. Some will take an active role in the startup business they have chosen to invest in.
While some angel investors may seek to be on the company’s board or act as an adviser without necessarily exercising day-to-day control, others may wish just to become sleeping partners (not sharing in the actual work of a firm) and simply provide the business with capital.
An angel investor with the right skills may be good for a small start-up.
According to research carried out by the UK Business Angels Association, British angel investors typically make 22% (IRR) internal rate of return) on their investments in startups. Other studies suggest returns in the US average about 27%.
Venture capital vs. angel investor: an angel investor is an individual while venture capital comes from specialized firms. An angel investor uses his or her own money, but a venture capital firm also uses other people’s or company’s money.
Venture money invested very early in a product’s or project’s life is known as seed capital.
In most advanced economies, more start-up investments come from business angels than from venture capital firms.
Business Angels – a huge source of investment
According to the UK Business Angels Association, private investors account for between £800 million and £1 billion early stage investment in the United Kingdom. It is the single largest source of early stage capital in the nation.
Owners of start-up business regularly report that company finance of up to $400,000 may be hard to obtain – even from banks and venture capitalists. Banks will need some kind of collateral before they consider lending money, while most venture capital firms are more interested in larger deals.
In such circumstances, the owners of small start-ups have to turn to business angels.
Some business angels specialize in helping firms in particular sectors with a proven track record that want to expand. These investors can usually help with growth plans not only by providing capital, but also valuable know how and access to their networks.
How to find an angel investor
Many angel investors can be found through one’s own network of personal friends, family, major suppliers, contacts, and clients.
You can also find people seeking angel investment opportunities through formal networking organizations. Many current active investors find their investment opportunities through these networks.
The oldest network in the US is called Band of Angels, which has more than 120 members who provide advice and capital for high tech start-up businesses. Its members have founded some well-known companies, including Symantec and Logitech.
Angels Den is the largest network in the UK, with approximately 4,500 members. It is an Angel-led equity crowdfunding platform that connects start-ups with investors. It offers three different types of investment: donation, debt and equity.
The European Business Angels Network (EBAN) is the pan-European representative for the early stage investor. It was established in 1999 by a group of pioneer angel networks in Europe. EBAN represents a sector that invests approximately €7.5 billion annually.
Video – Business Angels
This video animation talks about the European Business Angels Network (EBAN).