Understanding the Role of Angel Investors

Angel investors have gotten a growing amount of  attention in recent years, even in mainstream media. Better understanding this class of investors can help you determine what opportunities they may hold for your business.

Angel investors defined
An angel investor is typically an individual with high net-worth who is interested in investing his or her money in start-up companies in exchange for a share of equity in the business. Although angel investors can come from a variety of professional backgrounds, such as doctor or lawyer, many of these individuals are former entrepreneurs themselves who are looking to invest not just to gain a return on their money, but because they thoroughly enjoy the entrepreneurial process. Angel investors are also typically interested in spurring business success and economic growth in their communities.

Accredited angel investors meet requirements set forth by the Securities and Exchange Commission (SEC). Also, look for angel investors who can add some value to your company in addition to monetary support. This is likely to come by way of upper level mentoring and exclusive advice.

Keep in mind that despite their interest in launching small businesses, these investors are still looking for a return. This occurs when your business successfully grows and you eventually exit, typically through sale or merger.

While angels tended to invest in companies that were geographically close to them, this trend has begun to fade due to the ease of communication that Internet can provide to remotely located investors. Investors who prefer to stay within their region can often be persuaded to invest outside of it if they are co-investing with others they know and trust.

Comparison to venture capitalists
Both angel investors and venture capitalists invest in business startups in exchange for a share of equity, or ownership, in those businesses. However, there are some key difference between the two.

One of the biggest differences comes down to the source of funds. Angel investors are investing their own personal funds directly into the company. Venture capitalists, on the other hand, are typically investing funds realized from other sources, such as pension funds, insurance companies or foundations. Generally, you will find that unlike angel investors, venture capitalists are likely to come into play in later-stage businesses, although there are certainly exceptions to this. Angel investors become involved in business start-ups or early-stage enterprises.

Another key distinction can be seen in the size of the investment. Generally, venture capitalists are putting sums of $2 million or more into a financing round. Individual angel investors typically stick to smaller investments of between $5,000 and $100,000. You will often find, however, that angel groups will make somewhat larger investments, in a range somewhere between that typically made by individual angel investors and venture capitalists.

Investments by angel groups
Just as the name implies, an angel group consists of individual angel investors who have come together to invest collectively in entrepreneurial opportunities. While they can in many forms, these groups of investors share a number of common characteristics. They meet regularly to go over business proposals for potential investments and listen to pitches made by select entrepreneurs. Members then decide whether or not to invest in a particularly business. Those who move forward then work together to conduct due diligence to validate the proposed plan, review financial statements and gain an understanding of the history of the entrepreneurial team.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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