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Why Startups Use Angel Investors? (And how they work)

Last updated: August 7, 2022
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If you’re an entrepreneur, startup founder, or simply someone with a great idea, you should know about Angel Investors.


Angel Investors are wealthy individuals that focus on investing in small business ventures in exchange for equity. Typically, Angel Investors are more amenable to working with smaller startups that have a longer investment window, unlike venture capitalists.


In recent years, angel investing has become more popular thanks to sites like Angel Match that match startups with prospective Angel Investors. If you’re looking to launch your business but need the extra capital, you should consider and understand the world of Angel Investing.


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    How do Angel Investors Compare to Other Investors

    There are a few different ways entrepreneurs can raise capital when launching a startup.


    The most traditional way is by getting a small business loan from a bank. While this method allows you to retain all the equity in your business, you are expected to pay that money back over time, with interest.


    The other method entrepreneurs use to raise capital is to connect with investors. Here, startups have a choice, of working with a venture capital firm or with Angel Investors. In most cases, you will raise capital from these investors in exchange for equity in your company.


    You’ve likely heard of venture capital firms as the companies that make large investments in startups like Uber, Airbnb, and other similar companies. Venture capital firms generally work from investment funds and expect larger returns in a shorter investment window. Getting funding from venture capital firms is highly competitive and not an easy feat.


    Conversely, Angel Investors are a bit more down-to-earth. Angel Investors are typically individuals that work from their own capital and tend to have a longer investment window. While attracting an Angel Investor is also highly competitive, there are a lot of them across all industries.


    What are the Pros and Cons of Angel Investors

    While angel investing has become incredibly popular in recent years, there are several pros and cons entrepreneurs should be aware of.


    PROS:

    By working with an Angel Investor, the funding you receive does not have to be paid back, unlike a bank. In general, Angel Investors are interested in companies that are beyond the startup phase. These businesses already have a revenue with the potential for major growth and profits.


    Since Angel investors use their capital, they are typically more invested in your company’s success. Angel Investors can also have the added benefit of sharing their industry knowledge and connections. Breaking into certain industries can present a lot of obstacles, and Angel Investors usually invest in businesses they understand.


    CONS:

    Although there are plenty of upsides, there are some major disadvantages to using an Angel Investor. When raising capital with an Angel Investor, you can expect to trade in 10% to 50% of your equity in exchange for funding. In certain cases, Angel Investors can use their shares of equity to take control of the business if they feel you’re failing.


    Therefore, it’s important to understand how much equity you’re willing to give up in exchange for funding. If an Angel Investor has more equity than you, it can spell disaster down the road.


    What is Seed Round Funding

    When Angel Investors decide to invest in your business, the capital, or seed funding, will come in waves.


    The first seed round is the most important. This will be a smaller amount of money that will allow your company to hire a few key people and make early investments crucial to the business.


    For many startups, this first seed round is known as the “friends and family” round and will usually involve investments in the 5-figure range. If you already have a source of income, that capital can be used in this first seed round.


    As your company grows, it will be easier to raise capital from Angel Investors. Finding investors to raise funds is usually an ongoing process. Many companies will raise funds throughout the years to expand, overcome economic difficulties, or perform other business functions.


    What You Need for an Angel Investor

    Before you start searching around for an Angel Investor, there are some basic steps you should take. At a minimum, you should have a minimal viable product . Angel Investors will want to see a proof of concept before taking your business to the next stage. In general, the further along your business is, the better chances you’ll have of attracting an Angel Investor.


    Along with a minimal viable product, you should also have a concrete business plan. A business plan is your strategy for business success. It should summarize the main goals and obstacles of your business, including growth plans and who your target customer is.


    What do Angel Investors Expect?

    Angel Investors aren’t here to help you, they’re here for the money. Every Angel Investor will have a different ROI expectation before investing in a company. This figure can vary based on the industry, type of business, region, and other factors. A good rule of thumb is that Angel Investors expect a 30% return on their seed money.


    Angel Investors will also use this ROI figure to build an exit strategy. If your business winds up failing, Angel Investors will likely sell their shares of equity to make back some of their initial investment.


    Therefore, understanding your Angel Investor’s expectations will help you create realistic financial goals and properly mitigate risks with your startup.


    How to Find an Angel Investor?

    Figuring out how to connect with investors can seem just as hard as starting a business. With Angel Investors rejecting around 75% of offers, entrepreneurs should expect the process to take some time.


    The most common way to find an Angel Investor is to network. Through in-person events or on platforms like LinkedIn, entrepreneurs can discover and connect with various investors from different industries. However, this process can take time and is highly competitive.


    A more modern and efficient way of finding Angel Investors is by using sites like Angel Match . Angel Match has a database of over 90,000 investors looking to raise capital for a variety of startups. By using Angel Match, you can easily meet with Angel Investors that are right for you and your startup.


    Don’t just think about it, head to Angel Match and start searching for your Angel!