written by
Steve Kincanon
published Dec 15, 2023
The angel investing business market is huge globally, and the United Kingdom, Germany, and France are topping the charts with a combined net value of €701 million in this sector. Considering the market size and value they offer, angel investors have become one of the biggest pushes for startups.
As of 2021, they had already raised a seed-stage investment of about $950 million in over 1,000 startups. These groups and individuals are considered risk-takers since they invest money in new businesses with no strong presence in their industries. There's no telling whether the business will succeed or fail.
However, angel investing has huge benefits for entrepreneurs and investors alike. If you are considering finding angel investors for a seed round, here's an actionable guide to angel investing. Let's get started!
What Is Angel Investing?
If you've been wondering what an angel investment is, here's a clear definition: it is a process where high net worth individuals or groups invest in startups, providing them with the required funds and sometimes coaching they need. Angel investors use their expertise and years of experience in various industries to help startups enter new markets and navigate the challenges they may face.
But why do angel investors take such high risks, and what's in it for them? Angel investors empower new businesses with the funds they need to set foot in the market in exchange for equity in the company. They make high-risk decisions depending on numbers and market research, and things don’t always go their way. But when they do, they stand a chance to quadruple (or more) their initial investment.
Why Is Angel Investing Important for Entrepreneurs and Small Businesses?
Over 64,000 startups are beneficiaries of the $24 billion spent by angel investors in the US yearly. These yearly expenses contribute immensely to the growth of startups and small businesses, and their growth is a win for the investor. Angel investments are a win-win for entrepreneurs and investors if the product or service breaks into the market and sells as projected.
But what is the real importance of this type of investment for small businesses and entrepreneurs? Here are some of the top reasons small businesses and entrepreneurs need angel investment funding:
1. No Debts
Working with angel investors means your business does not owe any debt. Investors rely on the numbers they've seen, the market value, and your projections to get their money back. If your business fails, you are free to part ways; if it succeeds, they get their share of the equity.
2. They Offer More Than Money
While some startup founders have everything they need to move their business forward, most angel investors do not only offer money. They are experts in other industries, and they know the best ways to start and run a successful business, so they bring more to the table.
They offer their knowledge and expertise, access to their networks, other markets, and audiences, and advice and mentorship to their portfolio companies. But unlike venture capitalists, they do not get involved with the company's daily operations.
3. They Want ROI and Also Want Your Company to Grow
While angel investors want a return on their investment, most truly care about the business and genuinely want to see it grow. Hence, they'll go to certain lengths to ensure your product or service reaches the right audience.
Understanding the Basics of Angel Investing
Angel investors are individuals who are successful in other industries and founded or co-founded businesses but are looking for businesses in new sectors or similar industries to work with. Let's explore some of the basics of this market and how these investments benefit businesses.
Types of Angel Investors
Various investors step in at different stages, and some have a specific way of doing business. The common types of angels are lead investors, co-investors, and syndicates, and each has its pros and cons.
1. Lead Investors
Lead investors are usually the first angels to jump in. They provide the funding, support, mentorship, and expertise the company needs to take over current markets and launch into new ones. They invest more money and time than other angel investors.
2. Co-investors
As the name implies, co-investors invest alongside lead investors in various deals. They put in less money and effort than lead investors and have a high chance of spreading their funds across various portfolio companies. This risk management increases their success. However, it might be challenging to find individuals who are willing to co-invest in a startup.
3. Syndicates
Syndicates are angel groups that pool funds and invest in one startup or company. Unlike lead and co-investors, syndicates invest small amounts of money and time in multiple startups, diversifying their portfolio and increasing their chances of success. However, controlling investments or getting into such angel groups is also challenging.
Risks Associated With Angel Investing
Not all businesses receive the funding they require for many reasons, including risk analysis by investors. This measures the likelihood of the startup to succeed. Even though such conclusions are not always accurate, they are an important part of the process. Here are some of the risks angel investors undertake:
Startup Failure: As yearly startup rates are increasing to over 305 million worldwide, so is the failure rate, rising to a whopping 90% in a 15-year window. This is the number one risk angel investors face, and it is also one of the main reasons many individuals prefer to co-invest or join syndicates.
No ROI for Years: Another risk of angel investing is not getting a return on investment in years or at all. Entrepreneurs might have the best business idea or model, but their product or service might not sell well or yield the desired results in the first few years.
Little or No Control Over Startup Operations: While angel investing may require you to lend your expertise and knowledge to your portfolio companies, you may not have control over how the startup is run.
Benefits of Angel Investing
Generally, angel investors take less equity compared to venture capitalists. They also make investment decisions quickly, so if you do or don't cut the deal immediately or over a few days, they'll quickly inform you. Other benefits of angel investing for entrepreneurs and angels include:
Angel investments provide startups access to necessary industry knowledge and connections.
Investors get the opportunity to support some of the most innovative and high-potential projects.
Investors might get rich if the startup succeeds.
Investors and entrepreneurs gain new knowledge from working together on one product or service.
Businesses do not owe investors repayment and interest.
Angel investors are easy to find and work with.
For businesses requiring more funding later, angel investing gives you credibility and attracts additional financing.
Strategies for Successful Angel Investing
To successfully invest in startups and minimize losses, knowing the best strategies to follow is important. Here is a guide to angel investing to help carefully select what businesses to work with.
1. Researching Potential Opportunities
Identifying good companies to invest in goes beyond how much they've made since launch or the projections they portray. Before investing, ensure you know what they do, who they serve, and how they do it. Know their market, the company's relative value compared to similar businesses, the price-to-earnings ratio, and other factors important to you.
2. Building a Diversified Portfolio
Building a diversified portfolio as an angel investor is not just about venturing into various industries. The main reason to do so is to minimize risks and maximize returns. Since 20% of new businesses collapse in the first year and 70% fail in the first two to five years, investing small amounts of money in various startups will increase your chances of success.
3. Preparing to Make an Investment
The terms of investments are important, and they'll guide your inputs in the company and bring clarity to the entrepreneur on where, when, and how you're willing to support their startup. Since angel investing is a two-way street, the terms should be favorable to you and the entrepreneur. As an angel investor, you should be flexible and open to negotiating terms, like the amount you are investing and the equity stake you'll require for that investment.
4. Following Up on Your Investments
Closing on a great angel investment deal is only the beginning of your investment journey. If your investment terms include a timeline for frequent progress reports (which all agreements should), you can easily track improvement and monitor the performance of the startup. Doing this, you might uncover strategies that need revamping or new markets that can be conquered.
How Much Money Should You Have Before Angel Investing?
Only accredited investors can be a part of angel deals or join angel investment groups. This accreditation by the Security and Exchange Commission ensures that investors have a net worth of at least $1 million or an average annual income of $200,000 or $300,000 for married couples, excluding their home.
Secure the Best Angel Investment Deals
Great startups and good angel investments are everywhere; the only limitation is knowing how to approach or secure these deals. At Foreword Companies, we offer entrepreneurs and startups the coaching, training, and partnership they need to successfully onboard investors. Schedule a call with Foreword Companies today to learn how to bag a good investment deal.
