WHY “ANGEL” INVESTORS ARE GOOD FOR BUSINESS
Angel investors are wealthy individuals who provide capital to help entrepreneurs and small businesses succeed. They are known a “angels’ because they often invest in risky, unproven business ventures for which other sources of funds – such as bank loans and formal venture capital – are not available. Unlike banks, which hold you to stiff rules, offer little guidance, angels can act as mentors, providing encouragement, contacts, and cash while staying out of the day-to-day business.
Wealthy private investors provide global business with more than $50 to $100 billion annually, which dwarfs the investment made by traditional venture capital partnerships and offer a viable source of financing for capital hungry entrepreneurs. These individuals want to invest in up-and-coming new companies not only to earn money, but also to provide a resource that would have been helpful to them in the early stages of their own businesses. In many cases, the investors sit on the boards of the companies they fund and provide valuable, firsthand advice.
Like other providers of venture capital, angel investors generally tend to invest in private startup companies with high profit potential. In exchange for their funds, they usually require a percentage of equity ownership of the company and some measure of control over its strategic planning. Due to the highly speculative nature of their investments, angels eventually hope to achieve a high rate of return.
For many entrepreneurs, angels include friends, relatives, acquaintances, and business associates. In fact, nearly 90 percent of small businesses are started with this type of financial help. Some entrepreneurs gain access to angel investors through venture capital networks – informal organizations that exist specifically to help businesses connect with potential investors, and vice versa. The networks – which may take the form of computer bases or document clearinghouses – basically provide “matchmaking” services between people with good business ideas and people with money to invest.
Types of Angels
Although an angel can seem like the answer for an entrepreneur who is desperate for capital, it is important to evaluate the person’s motives for investing and need for involvement in the day-to-day operation of the business before entering into a deal. More and more entrepreneurs are turning to angels, but many are finding that partners are not always silent or willing to sit passively on the sidelines. In fact, while they may be brilliant in their own fields, many saviors have little understanding of the entrepreneurial process. Often, they invest for the wrong reasons or unrealistic expectations … knowing how to recruit the right angel and avoid the pitfalls of dealing with him or her can mean the difference between a solid financial foundation and a failing venture.
Several basic personality types tend to characterize angel investors. “Corporate angels” are former executives from large companies who have been downsized or have taken early retirement. In many cases, these angels invest in only one company and hope to turn their investment into a paid position.
“Entrepreneurial angels” are individuals who own and operate their successful businesses. In many cases, they look to invest in companies that provide some sort of synergy with their own company. They rarely want to take an active role in management, but often can help strengthen a small business in many ways.
“Enthusiastic angels” are older, independent individuals who invest as a hobby. As a result, they tend to invest small amounts in a number of different companies and become overtly involved in any of them.
“Micromanagement angels,” in contrast, usually invest in large amount in one company and then seek as much control over its operations as possible.
“Professional angels” are individuals employed in a profession such as law, medicine, or accounting who tend to invest in companies related to their areas of expertise. They may be able to provide services to the company at a reduced fee, but they may also tend to be impatient investors. Understanding the needs of various types of investors can help entrepreneurs to develop positive working relationships.
Avoiding Potential Problems
Regardless of the type of angel a business owner is able to recruit, there are a number of methods to help avoid potential problems in the relationship. Entrepreneurs should, for example, be very frank and honest when describing their business idea to a potential investor. Entrepreneurs should also interview potential investors to be sure that their goals, need, and styles are a good fit for the business. It is important to ask questions of potential investors and listen to their answers in order to gauge their needs and interests. Ideally, the angels’ investment approach will be compatible with the entrepreneur’s needs.
Entrepreneurs need to keep in mind that partnerships between angels and entrepreneurs are like marriages, involving issues of compatibility and cash. Even the best business relationships will need work. In fact, the success of the business depends on equal parts diplomacy and profit.
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