When the word “angel” comes to mind, one might think of an alleviating presence that guides and assists in accomplishing a goal. When paired with the term “investing”, the role of the angel becomes more financial in spirit. When navigating the uncertainty of the financial realm, especially as an up-and-coming business owner, it can be crucial for a person to have an angel investor backing their endeavors.
What is an Angel Investor?
An angel investor or a seed investor “provides capital for startup companies during early stages of development, and in return, they receive an ownership stake from them” NerdWallet(1). Not all business owners are rich or have access to loans that will help get their company off the ground. Think of all the Kickstarter campaigns that have been publicized to acquire money to execute creative projects, fund small businesses, and planning and organizing events. But, with an angel investor, the benefactor is usually wealthy. The angel or seed investor is kind of seen as a provider and nurturer of potential.
That potential is the possibility of the startup company stabilizing and becoming public on the market. The concept of a founder of a startup company fundraising for money or looking for investors might be somewhat of a well-known strategy to casual observers of the business world. But, knowing in detail how angel investing works might be more intermediate.
How Angel Investing Works?
As stated above, angel investing is where a wealthy benefactor offers their financial resources to a startup company in order to ensure its success and in the future (if they’re lucky) have a stake in the company’s growth over time. One never knows which startup will become the next big thing. Social media sites like LinkedIn and Instagram, a ride-service company like Uber, and lodging service Air B&B started as startup companies.
In angel investing the more risks are taken, the more rewards they could potentially get. “Angel investors typically finance a business startup at the very early stages. Often, these businesses might not even have customers or generate any revenue at all — they may have only a solid business plan, have completed a beta test, or built a minimum viable product. Angel investors don’t just throw money at any startup. They must see potential in order to have faith in what might be.
The money given to startups is often utilized to find avenues to either enhance or create the product. Then startups will usually try to study the market of the industry that they are in to see where they fit and how they can reach an audience that might be interested in their products or services. Like an angel in the spiritual sense, an angel investor has no set limit to how much (or how little) they can invest in a company. The incentive of angel investing is gaining a stake (also called stock) in the company as it gains value.
( Also Read: What Is Debt Financing? )
How to Become an Angel Investor
Make sure you’re qualified:
As an angel investor, in order for one to make money, you must already have some in the bank. At least $200,000 for around 2 years, to be exact. Plus, “your net worth must surpass $1 million in investable assets,” NerdWallet(2). The reason for these restrictions is to ensure that you are ready to handle the potential risk you are going to face.
Know how to source deals:
Like with any industry to make it as an angel investor, one must know how to network and stay in the know. This is crucial in locating deals and startups to sponsor. An angel investor can also link up with other angel investors to pool together their resources to fund a single company or deal. “The Angel Capital Association’s member directory(3) can help you locate a group to join, and its website shares information on how to start your own angel investing group as well,” NerdWallet (4). But, if you are a new angel investor and don’t have any connection yet, you could always contact the CEO of the startup company that you wish to fund directly.
Why Consider Angel Investing?
Even if you have over $200,000 in your bank account and have a net worth of over $1 million when the opportunity to make more money comes along, why not take it? If an angel investor’s sponsor is successful, then they could multiply their net worth 10 times over.
An angel investor could also become eligible for tax breaks for helping out a small company and be the catalyst for a new industry innovation that could revolutionize the way business is done.
Imagine watching a business that you funded from startup to billion-dollar corporation take you from millionaire to billionaire status. With these perks, the “why” of angel investing tends to answer itself.
Angel investing may seem financially intimidating but having the resources to fund a potentially innovating company that could change the world seems oddly addicting. Imagine the money you could earn from just owning a few stocks from an extremely successful startup. You would never have to work another day in your life, other than finding other deals and companies to fund.
Plus, look at it from the other side. You fund a small startup company enough financial resources for them to acquire the tools that they need to become a stable company and compete in the market. Then that company grows to dominate that same market to become an economic and influential force around the globe. Even thinking about such potential is enough for one to get excited about when and where to start. Angel investing may not be an easy world to enter, but once you meet the requirements it all steam ahead.