You have heard about angel investors and do not know what they do. So, what kind of investor is an angel investor? Or simply put, what are angel investors? Why are they called angel investors? Well, these are common questions people have.
An angel investor is also known as a private investor, a business angel, an angel funder, an informal investor, or even a seed investor. From these names, we can tell that an angel investor is an individual who provides money for the initial investment in a business. In exchange, an angel investor will get ownership equity or convertible debt.
The number of angel investors has been on the increase in the last 50 years or so. Some angel investors are available online through angel groups or angel crowdfunding networks. As such, there has been an increase in interest in these kinds of investors. For this reason, we have compiled several things entrepreneurs need to know about angel investors.
About Angel Investors
Here are things entrepreneurs need to know about angel investors:
1. Customer Endorsements
The first thing entrepreneurs need to know is that as they start their company, they need to have endorsements from customers. They must have piloted the products they will produce and have assurance from clients that they will buy such products. That is the right time to approach angel investors. It is even better if they already have a vendor network, a sales and delivery team, and logistics or an operation team. These are things that can give the angel investors confidence to invest in your startup.
2. Angel Investors also Provide Know-How and Guidance
Entrepreneurs need to know that angel investors will fund startups when these businesses are at the highest levels of risk. You will also want to know that angel investors will not only fund the startups but also guide you as a founder of the business. With this in mind, an entrepreneur will understand the investing model of these funders is rather simple. The angel investor will just participate as equity investors.
3. They Will Want a Good Return on Their Investment
You need to know that angel investors will require excellent returns from their investments. The money they invest in startups should give them good returns and they expect the value of the company to raise with any subsequent funds they plow into the company.
4. Angel Investors Want to Be Shareholders – not Lenders
As a clarification, entrepreneurs need to know that angel investors do not offer loans or debts. Angel investors are interested in year-on-year dividends on the money they put into the company. They also expect any surpluses to be plowed back to the company to ensure the company has a higher valuation in the long run.
5. They Understand that You May Need More Funding Later on
Angel investors understand that a business will subsequently need to raise another round of funds as it grows. As such, you as entrepreneurs will need to dilute your shareholding to accommodate the new equity for the angel investors. You need to know that angel investors still will expect the founders to be majority shareholders. This is an issue of trust in the company.
With the above tips in mind, one should be ready to decide on whether they require angel investors in their company or not.
Interesting related article: “What is a Venture Capitalist?“