Angel Investor

Why and how are angel investors useful and important? Who are they and how do you find them? How does a company profit from their use and what is the cost of using them? Angel investors can help a business get off the ground or they can help rescue businesses in financial trouble.

Angel Investors Overview
Angel investors are a private source of investment money, usually used to help a promising company grow and meet their potential. The angels fulfill a need for capital that cannot be met by bank loans or the private means of the current owners. Sometimes they also offer consulting and management advice.

Angels offer a unique way for a business to raise capital without making money commitments of their own in the way of loans or getting new permanent partners.

These are not regulated investments as the SEC assumes the angels are sophisticated investors and do not need government protection. They have the knowledge and experience to do their own due diligence when making an investment decision.

This is a special area of finance that is not tapped by as many companies as it should be. Small companies could grow well beyond what the owners expect if they had the money and knowledge an angel or a group of angels could bring to the table.

Angel investors are typically private affluent investors who are interested in finding small companies with a potential for significant growth. The company needs capital that is not available through other means. A private investor, angel, or person that has entrepreneurship desires could make funds available. These investments are made in lieu of a public offering. An angel investor takes on higher risk investments in hopes that the company becomes profitable and could be taken public or purchased. Angels usually have sufficient risk funds that they can put up and take the chance that their investment will work or fail. The reasons they are called angels is they can provide money that would or may not be available in any other way, thereby "saving" or "helping" or "protecting" the company.

Angels are also known to be capital providers for start up businesses who have good ideas, but nothing to back it up. They are providing capital to get the business idea off the ground. These affluent capital providers are often people who ere very successful with a company they started and sold for a substantial amount of money. They may have been lucky to be a part of someone else's company and gained a large stake from the stock options he owned. In any event, this type of investor has risk capital and is willing to take the opportunity to make money with a new company. If they like the odds of the business growing in a profitable way, they will make the investment.

How to find Angel Investors
In major financial centers bankers and brokers know angels or angel associations. There are also angel associations or companies listed on the Internet. These will come up if you put something like "private angel investors" in a search engine. After locating investors for angel financing, the next step is to have a compelling proposal to show them or be prepared to give a verbal presentation to a group. Getting a chance to present your case is only the first step in acquiring angel investors. The presentation or proposal must excite their imagination and hook them into seeing the potential for the company. They must be convinced that your business plan for the future is possible with a good chance of succeeding. They will ask questions they want the answers to or to see if you have thought of potential problems. Their feel for how well you have thought out your need for money will go a long way to getting them on your side. They need to see a potential for dramatic growth and a reasonable payoff for their investment.

If these elements are legitimately in your business plan, you have a chance of getting some interest. This is when the hard work begins. Remember they are trying to find a place to put their money that will show them a good return. It is critical that this part of the discussion is considered beforehand. Really well thought out answers should be at the top of your mind. Good reasons to expect future growth are a necessity if this deal is to be made. If new products or services are to be used to obtain this new growth, you must show solid reasons for needing them. If the investment is being used to hire new employees, justification of this expense must be presented and the kind of return that could be expected should be shown.

The most important part of this presentation or proposal meeting is preparation. Not being able to answer obvious questions is a severe negative. Analyze your plan, determine what is needed, and practice answering questions before the meeting.

Why Use Angel Investors?
The reason a business should consider using angel investors is their investment does not have to be repaid like a bank loan. The private investors are temporarily buying a percentage of company. If the company grows and can be taken public, the angels will gain on their investment. If another larger company purchases the company, the angels will be cashed out at a profit. This is why the angels take the gamble on a good idea or good business prospects for a company. The business does not obligate itself to a loan that has to be repaid or any interest payments.

The money from the investment can be used to expand the business, buy needed equipment, or hire special employees. Many businesses have reached the point where growth is necessary and this input of capital can make the difference in being able to take the next step. Moving past this wall against future development is one of the valid reasons to find and use angels.

If a company cannot qualitfy for the loans they need to expand their business, is is a good idea to utilize angel investors. This method also eliminates expenses that cannot be paid on a monthly basis and gives the business the freedom from restricting debt. If the company desires to grow and cannot get the capital needed this is a valid means of getting non-obligation capital until the business is taken public or sold.

Obtaining money from private investors or angels has the added advantage of gaining from their experience and prior business knowledge. They could also easily know people or businesses that could use your products or services. This may be one of the reasons that they came aboard with your company. Do not hesitate to use this new source of information if a deal is made. They may have solved the problems you have in another business. Use their experience and knowledge as they are now vested in your success.

How are Angel Investors Helpful?
Angel investors are useful for obtaining seed capital in order to get a company started. Raising capital this way is one way to obtain financing without any repayment obligation if it does not work out. On the other hand, this method for getting money needed to let the company grow lets both parties have a chance if the company is successful. This private type of investment is free from SEC regulations and can be quickly arranged without great upfront expense. Requirements from an angel can be negotiated and can be very liberal. This lack of restrictions can be freeing and allow for the company to make the moves needed to be made at the time they are needed to be made. The sharing of risk with an angel can make the risk more palatable and easier to take. It allows these steps to be completed and the growth of the company can be set free and liberated from financial restraints.

Benefit Derived
Without the money the angel investor provides, the company may not succeed or be delayed in its growth. The angel may give advice, which is timely and keeps mistakes from happening. Also, the angel may have contacts, which could help the business grow. So the private investor provides needed funds at the right time. The business advice could be critical at specific times during a growth period. Experience and money are very useful to any business.

There are usually no fixed repayment plans in an angel investment. The investor is looking for the payoff of going public with a stock offering or selling out to a larger company. They are not expecting an immediate return.

Costs
The expense of having an angel investor is the owners are giving up a percentage of the business until it is taken public or sold. If the deal does not work out, the business owners do not owe the investor any money.

The cost of a successful angel investment comes when the company is sold or is taken public. The investor will own a certain percentage of the new stock or of the sale proceeds. It may seem like a high price to pay, but, without the investment, the new wealth may not have happened.

There could also be some loss of control of the company if the deal includes the use of the angel to help in the day-to-day running of the company. For some owners this could be a serious problem, which they could not live with. Many business owners do not easily give up the ability to call the shots. This is a negotiated part of the deal with any angel group or private investor. This part of the deal should be carefully written so there are no surprises later. The money is nice, but may not make the loss of control worth it to some business owners.

Time Investment
How long can the company expect to be involved with an angel investor? It depends on the growth and success of the company after the angel becomes involved. Companies have to reach a certain level of sales in order to be taken public or attract a buyer. There could be an agreement between the angel and the business that they could be bought out for a price certain at specific time periods. All of these factors can determine the length of the private investors involvement. Due to this, the time of an angel connection to the company can be short or several years. If the angel is providing ongoing management advice or work, their time with the company can be even longer.

Most angels make a time commitment as well as a money commitment to a company in order to see the investment bear fruit. If the project is interesting and captures the angel, they could remain associated for an extended period of time. This could extend past the public offering or sale. It depends on the angel and the nature of the business. If it is an enjoyable relationship, this may be an added advantage of having this angels help.

Other Services Provided
Aside from the money they provide to the company, the angel can bring experience and advice. They can also contribute management skills or special expertise. They may have legal knowledge or patent knowledge or know someone that does. Their prior business experience can be of great value to the company. Their investment is important, but their business knowledge may be even more valuable to the growth and success of the venture.

What does the Angel Investor Gain?
The profit an angel can receive from their investment can be several hundred percentage points over their original investment. This is one of the reasons they can afford to take the risk they take. A successful deal can cover prior losses and make their investment do quite well. They also receive a rush from deciding to help a young company and then seeing it work. The success of the company validates their ability to pick a winner out of all the deals they are presented with. A string of good investments helps their confidence in finding winning situations and means they can offer their help to other young companies with good ideas or a potentially profitable product.

The angel investor fills a needed niche in the financial world. Companies with no ability to obtain loans or new long-term partners still have the chance with these investors. Money at the right moment in a company's life can make all of the difference in the scheme of things. The tipping point between success and failure can be that close. The experience, skills, and advice they can offer to a business they become involved with can also speed up the move to success or the make the path to the future more easily seen. Angels as a group are willing risk takers if they feel there is reasonable chance for the venture to perform. Private investors as a group provide young companies with good ideas and the chance to develop and become vital in their chosen industry.

Providing the opportunity for new ideas to flourish is a needed element for a growing economy. Angels are the enablers of companies to achieve this.


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