What Do Angel Investors Do, and How Can They Finance Your Startup

What Do Angel Investors Do, and How Can They Finance Your Startup
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Angel investors can help you get the money your startup needs to expand. Knowing these benefits and drawbacks is useful when dealing with them.

Do you need an angel investor to support your startup? You might be in luck if so. The Angel Capital Association (ACA) estimates that over 300,000 angel investors have invested in the last two years. This manual explains how angel investors operate and how to locate an angel investor for your business.

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Angel investors: Who are they?

An angel investor is a wealthy individual who is frequently a current or former business owner. They make their own investments. In contrast, risk capital firms use venture capital (VC) investors to make investments with other people's money.

Because they can earn greater returns from startups than they might from publicly traded stocks, bonds, or mutual funds, angel investors invest in them. However, angel investors have other reasons for investing besides money. They may also make investments for social causes. For instance, female investors are twice as likely to finance ventures that have a positive social impact or are led by women.

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Accredited investors: what are they?

The definition of accredited investors is found in Rule 501(a) of Regulation D. A person who satisfies the following requirements is considered an accredited investor by the U.S. Securities and Exchange Commission (SEC):

  • Anyone whose individual net worth exceeds $1,000,000 (or their joint net worth with their spouse or the spousal equivalent)
  • Anyone who had a personal income of more than $100,000 in each of the two years prior and who reasonably anticipates having a similar income level this year. If combined with the individual's spouse or spousal equivalent, the income threshold is $300,000.
  • Anyone who has earned one or more professional certifications, titles, or credentials from a recognized educational institution, as determined by the Commission, is eligible to become an accredited investor.
  • Anyone who satisfies the requirements of Rule 3c-5(a)(4) of the Investment Company Act of 1940 (17 CFR 270.3c-5(a)(4)) and is a "knowledgeable employee" as defined by that rule.

What distinguishes an accredited investor from an angel investor, then? Although the majority of angel investors fall under the category of accredited investors, the two terms are not always equivalent. You have the best chance of getting funding from angel investors if you know more about what they are looking for.

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Angel investors' pros

Regardless of their precise motivations, each angel investor is likely to consider each of the following before investing in your startup:

  • Rapid Growth - Investors prefer to put their money into successful businesses. That means they want to see that yours is growing or at the very least moving in the right direction.
  • Leadership - Investors prefer to work with teams of strong leaders who have the necessary knowledge or abilities. They may consider more than just your professional background, depending on their social motivation.
  • Early Results - If you can demonstrate that you're already getting the results you want, you'll have an advantage. For instance, perhaps you've already developed a minimum viable product and have heard good things from your beta testers.
  • Long-Term Strategy - In order to determine whether you are ready for the long haul, angel investors may inquire about your future plans or mindset.
  • Risk analysis - Angel investors want to know if you've considered every possibility before investing in a startup because it's a risky move. In a job interview, this is akin to being asked about your biggest weaknesses. It's not always necessary to tell people there are no dangers or weaknesses. They want your risk mitigation strategy and an honest, realistic assessment.
  • How You'll Use the Investment - Angel investors like to know exactly where their money is going before they invest large sums of cash. Are you investing in marketing, hiring a team, purchasing inventory, renting office space, or something else?
  • Valuation - Investors need to have a sense of the value of your business, including the products and services you offer. They prefer to see transparent numbers regarding your possessions, liabilities, and anything else that can aid in a precise valuation.

You have a better chance of getting funding from angel investors if you are aware of what they are looking for in a startup.

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Reasons to Employ Angel Investors

The advantages of working with angel investors are numerous. There is no expectation of repayment, at least not on a monthly basis, since an angel investment is not a loan. Later rounds of funding or acquisition allow angel investors to recoup their investment. If you've had trouble getting a loan, angel investors are also willing to take risks that banks aren't.

Angel investors frequently provide a startup with more than just money. Since so many angel investors are currently operating businesses or have previously done so, they frequently have experience that can help you grow. Angel investors are probably very devoted, especially if they share your goals and values. They'll be motivated to support you as a result, and not just for financial gain.

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Angel investors' drawbacks

While angel investors may not require monthly repayment, startup founders must exchange equity. Giving up some control over your company may be necessary if your investor is particularly involved. Additionally, it can be challenging to find an investor even if angel funding makes sense for your company.

Where to Look for Angel Investors

If you already know the right people, finding angel investors will be simpler. However, if you don't, you might want to consider a website for online investing like Angel Investors Network. Otherwise, you might want to investigate how your rivals were funded.

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How to Attract Angel Investment

One of your best tools for approaching a potential angel investor is a compelling business plan. The more information you can provide about your startup to demonstrate that you are considering every possibility, the better your chances are. It would be best if you could create a working prototype to use as a demonstration.

Take Advantage of Your Angel Investor

Angel investors are a great source of startup capital, but it's important to weigh the advantages and restrictions before signing a contract. If an angel investor is appropriate for your business model, having the best pitch is crucial.

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