Angel investing, or any other type of investing early in the life of a business, can be quite risky. Often, angel investors don’t receive a return on their investment. Why would an angel investor take that chance? Here are four reasons why:
Excellent Return on Investments
The downside of angel investing, as with options (though options are quite different), is limited to the amount of money initially invested. The upside, though, is an unlimited return on the investor’s funds if the investor is given an equity share. If the company they invest in is extremely successful, they can earn their original investment many times over and overlook investments that were less successful.
Relationships
Entrepreneurs, who are often angel investors, and particularly serial entrepreneurs have business associates that know their past endeavors and support the ideas of their colleagues. Friends and family may also invest as there is a high level of trust between people who have known each other for a significant period of time. Friends, family, and colleagues know you, your business skills, and whether funding your endeavor is wise.
Angel Involvement
Many angel investors are skilled business people who want to help you with your business. If they think they can help your business be successful, they are willing to provide funds and human capital. Help and experience are great, as great ideas need human support to come to fruition. Don’t think of needing help as a negative; think of it as a leg up.
Risk vs. Reward
Any new business student knows that higher risks brings greater rewards. Some angel investors enjoy the risk involved with angel investing. They realize funding fledgling businesses is risky, but the financial upside is too much too ignore.
Peter