What is an Angel Investor?

 

 

A comprehensive guide for Founders on the who, what, and why of Angel Investing.

Ever wonder what's common between Google, Apple, and Meta - apart from being major multinational enterprises? It's that they were all funded by angel investors in their early stages of growth.

While the burgeoning popularity of subscription-based financing has led to questioning traditional options, angel or 'seed' investing continues to remain a viable choice for founders in their early stages. What's more, seed funding deals in India raised a whopping 746 crore in the year 2021 alone!

This brings to focus the merits of angel investing and how founders can leverage this funding option to accelerate their start-up's growth. In this article, we will be walking you through the basics of what angel investing is and whether you should (finally) take that leap. Let’s dive in!

Angel Investors: Who Are They?

Think of angel investors as high-net-worth individuals who fund a company in its early phases. They invest their own money, usually in exchange for equity or debt. This initial support catalyzes economic growth and helps bring the funded company's vision to fruition over time. Unlike a Venture Capitalist, angel investors take a leap of faith at a stage where most VCs would be hesitant to do so; albeit with a smaller amount.

So, who exactly can be called an angel investor?

• An angel investor may or may not be an 'accredited investor', that is, someone who earns at least 2 crores annually or has a net worth of 7.5 crores, half of which must be in financial assets.
• Successful entrepreneurs and investors who strongly believe in the business or want to enter a booming industry.
• Business professionals, doctors, lawyers, financial advisors, executives, and others seeking to invest in potential companies and willing to take high risks for high returns.
• 'Angel syndicates', where a group of these investors chips in money to fund a deal.
• Crowdfunding platforms that allow many individuals to provide small amounts of capital, thereby raising a large sum through collective efforts.

A Heavenly Affair: How Angel Investing Works In 2022

As of 2022, most angel investors usually don't demand more than 20-30% of company shares. Here's what the investing process would be like for a founder:

• Finding angel investors pertaining to their industry. This can be through referrals, conventions, online networks, or social media platforms.
• Proposing a pitch deck where business plans and ideas are presented to convince investors. Pitches with hard-hitting statistics and a clear mission and vision are likely to flourish.
• Conducting due diligence where angel investors perform background research and fact-check claims made by the founder.
• Negotiating terms and drawing up a term sheet, discussing investor rights, economics, management, exit scenario, and the like.
• Closing the deal after all legal paperwork is done and mutually agreed upon.

While the process is straightforward, the real deal lies in finding a befitting angel investor.

How To Find an Angel Investor for Your Start-up?

Angel investors assist start-ups in their seeding stage- after the founders have raised initial capital, and before Venture Capitalists are approached. In these critical stages of ideation and/or validation, angel investors spawn the company's growth.

How, then, can you find one for your start-up?

The best way to begin searching for them is within your vicinity. Approaching capable investors within your community by word-of-mouth, through local seminars, referrals, online forums, and business conventions is your best bet. Remember the phrase 'your network is your net worth?' Exactly.

Likewise, the brand's visibility in the market can come in quite handy when approaching via these platforms. Looking for prominent investors in your industry or domain will ensure you get the perfect mentor who assists your journey with more than just funding.

Angel investor platforms like LetsVenture, Ahventures, AngelList India, and Indian Angel Network are also great networks for owners to explore and connect with leading investors in their domain.

Alternatively, LinkedIn is a reliable platform where founders can directly approach the angel investors that they would like to close a deal with.

Rise Above the Ground: Benefits of Angel Investing

• No Indebtedness: Unlike a business loan, owners do not need to pay back the entire amount that angels invest. While it does have its own reasons for apprehension, angel investing is relatively easier to acquire than a VC funding and less risky than a business loan.
• Industry Experience: Angel investors not only provide capital for growth but also bring with them an idiosyncratic set of industry experience and business acumen. They may be proactively involved in your company, which means owners also get actionable insights to succeed over time
• Network: Angel investors could also aid in sourcing new customers through their connections, PR and marketing.
• Long Term Game: Angels fund companies when they require capital the most, so it is likely that they would be invested in making it succeed too -which translates to more cash in the long term.

The Fallen Angel: Disadvantages of Angel Investing

• Dilution of equity: Since angel investors acquire a piece of your company, things could get expensive down the line as a significant portion of the company's future earnings is given away.
• Loss of control: As you continue to grow through angel investments, the dilution could both lead to a loss of control. Investors may eventually decide that they want to play a bigger role in making business decisions.
• Naive investors: Money alone shouldn’t be why you approach an angel investor. Investors with poor financial advice or expectations of quick returns while subjecting owners to immense pressure could be a major disadvantage.

As Bill Gurley rightly said, "Having an investor who is naive about public markets or finds them complex or scary is non-optimal."

Nonetheless, there is a way to overcome these disadvantages in 2022- and the answer lies in subscription-based financing.

The Seraphim of All Options: Subscription-Based Financing

Equity is expensive. While angel investing allows founders to raise capital initially, giving away even 5% of equity means that the person owns that portion of your net worth and profits forever.

What if there was a way to acquire capital without fear of dilution or debt? That's where subscription-based financing steps in. Platforms like BridgeUp allow companies with recurring revenues to raise capital fast- with no external pressure and room to grow at their own pace.

Explore the seamless world of subscription-based financing with BridgeUp- India's first recurring revenue platform that helps you scale faster and better. To know more, call us on +91 -9819660287 or drop us a query on the contact form here.

Related Resources

• Differences Between Angel Investors and Venture Capitalists
• Venture Capitalist Alternatives
• What is a Venture Debt