Entrepreneurs are almost always in need of capital specifically money for their for-profit operations. Unfortunately, money for business can be difficult to find especially with the current state of the economy where business confidence is at an all-time low. The good news is that angel investors can come to the rescue under certain conditions.
But before rejoicing at the news, it is always a good idea to step back and see the whole picture. Tapping into the so-called angel network has its pros and cons that every start-up entrepreneur and businessman seeking capital must know.
What Is an Angel Investor?
In most cases, an angel investor is an affluent individual who provides the required capital for an entrepreneur like yourself. The emphasis is on an individual instead of an organization since the latter are called venture capitalists in the conventional sense. However, an increasing number of angel investors are pooling their monetary and non-monetary resources to form angel networks so you now have a larger pool of individuals to tap into.
What are their Fund Sources?
As private individuals, angel investors usually invest their own personal funds into the business. Their own sources of money can include trust funds, investment funds and even inheritances. In contrast, venture capitalists use the pooled money of other individuals in a managed fund.
Angel investors are usually the second round of fund sources after your family and friends. Unless you have an ultra-rich circle of family and friends willing to lend a helping hand, you will be hard-pressed to raise the entire capital requirement from them. Thus, you will tap into the network of angel investors in your community that can provide for the substantial amount.
What are their Requirements?
Lest you start thinking that angel investors are in it for charity, think again. Because so-called angel investments are extremely high-risk by nature and are typically vulnerable to investment dilution, you have your work cut out in convincing the prospective angel investors that your start-up company will provide for a high rate of return on investment within the holding period. This is where your well thought-out business plan and presentation will come in but that’s another story.
Just how high should the return on investment be? Well, it depends on the angel investor but the ideal going rate nowadays is 20x to 30x the original capital investments for the 5 to 7 year holding period.
But since reality is not often in tune with the ideal, the effective internal rate of return on successful angel investments is 20% to 30%. This is still relatively high but you must keep in mind that the angel investors are taking an extremely high risk proposition when investing their money on your start-up. Plus, most banks will not even consider loaning you the amount because your business will not fit their bill of the ideal debtor.
So, where can you find angel investors? Your local community may already have one so it’s always best to ask other businesses, ask the industry association and even do the rounds of retired executives. You will find that your initiative in doing so will be the first step toward going bigger and better where your business is concerned.