A Business Angel or Angel Investor is a wealthy individual who invests personal capital in start-up companies. They invest in return for an equity stake. In other words, when they invest they obtain a percentage ownership of the start-up business. A start-up business or start-up company is one that has recently been set up, i.e., it has just started.
In this article, you will see term ‘business angel’ as well as ‘angel investor.’ They have the same meaning.
Business angels expect their investment to give them a good return. Some will take an active role in the startup business.
While some business angels are active board members, others act as advisers and keep out of day-to-day control. Many become sleeping partners. In other words, they provide the capital and but have nothing to do with the running of the company.
Business angel – good for start-ups
A business angel with the right skills may be good for a small start-up. They act as a catalyst for further investment, attracting additional capital through their endorsement and backing of a start-up.
The UK Business Angels Association says that business angels typically make 22% IRR on their investments in startups. IRR stands for Internal Rate of Return. Other studies suggest returns in the US average about 27%.
Venture capital vs. business angel: a business angel is an individual while venture capital comes from specialized firms.
Business angels use their personal money. Venture capital firms, on the other hand, use either other people’s money, the company’s money, or both.
Seed capital refers venture money that business angels invest very early in a product’s or project’s life.
Business Angels – a huge investment source
Owners of startup businesses regularly report that company finance of up to $400,000 may be hard to obtain. Even getting this funding from venture capitalists and banks is extremely difficult.
Banks want collateral before they consider lending money, while most venture capital firms seek large deals.
Consequently, small start-up owners have to turn to business angels.
Some business angels specialize in helping firms in particular sectors. The angels focus on businesses and teams that want to expand. However, these teams must have a proven track record.
Business angels often bring a wealth of industry-specific experience and knowledge, which can be pivotal in guiding a start-up through its formative stages.
These investors can usually help with growth plans. Not only do they provide capital but also valuable know how. Additionally, business angels may provide access to their networks.