Angel Investors
Angel investors in the United States and Europe
Anangel investor is NOT an investor with golden wings and a halo but rather an individual who provides startup capital to a new business and expects a percentage of ownership equity in return.Angel investing is a common business practice in the United States and Europe but will often take ondifferent names depending on the country.In the United States, the term ‘angel' derives from the early twentieth century when wealthy businessmen eagerly invested in lavish Broadway productions. Throughout Europe, an “angel investor”is known as a “business angel,” a financier who provides equity capital for startup companies andgrowing firms. Regardless of location, most angel investors invest their own capital, although there are
some angel groups (or angel networks) where several investors combine their capital so they can investin more opportunities.
How angel investors differ from venture capitalists
Venture capitalists, on the other hand, are quite different from angel investors. Rather than using their own funds, VC's invest pooled money from other people. In addition to the percentage of equityinterest in a company, venture capitalists usually desire an active say in the invested company's business decisions.Venture capitalists also have the tendency to invest in expanding companies,
although many VC firms have begun to invest in early stage businesses as well.
The benefit of obtaining angel capital
Many lending institutions are very hesitant about early stage ventures; therefore, it can be very difficultto obtain the necessarystartup capital for a new business. If a prospective entrepreneur is unsuccessfulin borrowing money from a bank, s/he may often resort to an angel investor to raise capital. Theaverage angel investor can invest anywhere between $150,000 and $1.5 million in a given venture.Manyangel investorsare retired executives or business owners who have the money, knowledge, andexperience to mentor new entrepreneurs so they can stay abreast of developments in a particular area of industry. An experienced angel investor can provide valuable knowledge and skills to an entrepreneur on how to run their business during its early stages of development. They may also be a good source of useful contacts, allowing the entrepreneur the opportunity to network with others in their industry.Often, theangel investor has their invested company's best interests at heart; therefore, entrepreneursshould find an angel investor's insight and resources beneficial to the company's success.
The angel investors' return on investment
Due to the risks associated with investing in a new company, an angel investor will often expect a veryhigh return on investment (ROI). Since it is a proven fact that many new companies will fail, an angelinvestor will expect a return up to ten times his/her investment within several years. Angel investors believe that this amount will balance the large risk of losing their invested money.There is often a defined exit strategy (perhaps through an acquisition or initial public offering) in case acompany does not perform as well as expected. The Angel Capital Education Foundationrecommends
that in order to compensate for the high risks associated with investing in new companies,angelinvestorsshould aim for twenty to thirty times the return on their initial investment. In actuality, thisreturn, after covering failed investments and holding time over a number of years, may be about twentyor thirty percent. While most angel investors will fail in about 1/3 of all of their investments, they
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