Angel investors are individuals who are ready to invest in a business. Older, established businesses and startups alike look for individuals willing to invest venture capital in their business. The individuals who are ready to invest look for companies that have a positive growth potential. Angel investors get their name because they select new companies that have no revenues in the beginning or established companies that have revenues. Depending on the agreement, angel investors stand to benefit by receiving a predetermined percentage of revenues, and they also acquire some controlling stake in the company. These investors play a defining a role in kick-starting businesses and giving practical form to ideas with their financial support.
Where Are Angel Investors Found?
These investors are normally found in metropolitan areas or areas where there is a vibrant economy. The funds acquired from angel investors can be used for a variety of purposes such as research and development, marketing, hiring more staff, and introducing a new product. They may even be used just to keep the lights on while the business finds its feet.
What Does it Cost to the Company?
It is a fact that most new businesses end up folding within a few years of opening their doors. In spite of this risk, these angel investors pump in money, essentially betting on the success of the business. Because they are essentially betting against the company’s failure, angel investors request a substantial amount of returns to offset the risk.
The cost is surely a significant amount. Capital acquired from angel investors costs no less than 10% of the equity of the company. For early stage companies, for which the risk is greater, it could reach as high as 50%. Some angel investors also charge a management fee as a monthly retainer. Though angel investors are easy to find, companies may find it difficult to negotiate with them as the investors may demand different terms. The amount of funding acquired from angel investors may range anywhere between $300,000 and $5 million.
Where Exactly Can a Business Find Angel Investors?
Angel investors are often found to be lurking around universities and college campuses because of the business activity that the students can generate. In case a company is looking for money, it can get in touch with the nearest university that has an entrepreneurship program. The university personnel can lead companies to angel investors. The other source is business incubators. These incubators offer services such as access to shared services, subsidized rents and exposure to entrepreneurship skills.
Many angel investors have started forming venture capital clubs. These clubs are always on the lookout for companies that need capital. Apart from official angel investor clubs, there are several investors who come together as an informal group. Here the members may invest independently or they can jointly invest in a company.
Where Can a Company Look for Angel Investors?
There is generally a denser population of angel investors near major metropolitan areas. This is mostly because there is more of just about everything in these areas. On the other hand, areas where the economy is driven by technology businesses and innovations in technology, like Silicon Valley, tend to house a disproportionately large number of angel investors looking to find the next big thing before anyone else does.