An angel investor is someone that has a high net worth and an entrepreneurial background.
They typically seek a higher return on the money they invest. Because they usually invest their own money in the venture, they are focused on helping the entrepreneur become successful. An angel investor may make a one-time investment or provide funding over time.
To be an angel investor you generally need to be an “accredited investors” and have:
- A net worth of at least $1 million in assets (or)
- An income of at least $200,000 for an individual and $300,000 for a married couple for the past two years
- The financial ability to invest
Being an accredited investor does not automatically make you an angel investor. But most angel investors are accredited. The reason for this is start-up companies who pitch non-accredited investors end up with onerous reporting requirements. If start-ups solicit non-accredited investors, this can create significant issues for the start-up.
So who are Angel Investors?
Angel investors are usually retired entrepreneurs or executives who have an interest in continuing to participate in business and the startup world.
They have the resources and ability to serve as mentors to new startup companies – they take a chance on new businesses and new entrepreneurs.
In theory, this is a great concept. In practice, there are a lot of problems with Angel Investing. The process is slow and long, you have to talk to a lot of people to get a little bit of money and, most of the time, individuals are making investment decisions.
You may find an angel who will fund your business. In that case, well done. Often though you have to approach strangers and network your way to many investors who will evaluate you and your business. The process of evaluation is due diligence.
Angel investments are extremely risky for investors, so this due diligence process is very important. However, most people are not very good at due diligence, or they have experience in one area of business but not another.
Angel investment groups are a way for angels to come together, share due diligence, and make more informed decisions. The show “Shark Tank” is based on the angel investor group concept – though generally the process is not as entertaining and the angel investors are not as rude.
When you approach Angel Investment Groups you will give a short presentation to the members. They will decide how interested they are and if there is enough interest form a due diligence group that will dig into the details of your company.
There are many ways to value startups but the reality is pretty simple: Angel investors want 25% to 30% of the equity in exchange for the money you need to get to the next round. So if you need $1 million they will test whether your business is worth $4 million.
To be worth $4 million today they have to believe that your business will be worth, $40 to $120 million in three to five years.
From here there are all kinds of changes and permutations, ways to structure deals, and negotiations that take place.
In the end what you want is an investor who will support you with money, but hopefully also advice and contacts. What they are looking for is an investment that will generate a nice return and where their expertise can help deliver that success (or at least mitigate the risk of failure).
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