What is Equity Funding
EQUITY FUNDING: ANGEL INVESTORSA.
A. WHAT IS ANGEL INVESTORS FUNDING
Angel Investors are equity investors who provide capital for start-up business or growing firms in exchange for company shares or convertible debt. Angel investors put their money in companies, often start-ups, with the aim of eventually getting high returns once the business has matured and becomes profitable. Angel financing often bridge the bootstrapped capital and the venture financing that entrepreneurs hope to get farther down the way.
Angel investors are usually affluent, wealthy individuals who use their own private resources to make investments. Most Angels are accomplished entrepreneurs themselves who want to help out budding entrepreneurs not just by contributing money but also sharing their time and expertise to ensure the business’ success. Since Angel investors use their own personal finances, they are more flexible to negotiating the terms of the investments. However, compared to VC’s, their resources may be limited.
Angel investors may make investments as individuals or as a group. Angel investors may form a group or networks and pool their resources so they can make investments in more businesses. Angel investors exist all over the world. Most are maintained within a region and make investments locally to ensure the active involvement of the members’ in their investments while others finance national and even international businesses.
If your business — say, a corner deli or gift shop — has no great plans to expand or enter new markets, an angel investor simply won’t be interested. Because angels hope to make money by taking equity — usually preferred stock — in your company and realizing a large gain when the company is sold or goes public, they generally don’t invest in “lifestyle” companies—that is, small consulting firms, local restaurants, retail shops or any businesses with limited earnings potential.
B. HOW ANGEL INVESTORS WORK: THE ANGEL INVESTMENT PROCESS
Angels are a class of wealthy individuals who make investments on companies that can yield them high return of investments. Angel’s investments come from their own pockets and can be various amounts of funding. Angel investors do not ask entrepreneurs to pay them back rather, what Angels ask for in return is an equity stake in the company. This means that a portion of the company’s share will be given to the Angel, and how much or how little they get back of their investment depends on the success or failure of the company. Given the risk of investment in start-up companies, angel investors often expect a 20-30% return of investments after in 5-7 years and these percentages may vary.
The first step in trying to get an Angel finance your business is to find one. Look for people like friends, family, business contacts and even other entrepreneurs who can refer you to an Angel. Monbi.com for example has an extensive list of Angel investors in various regions and even all over the world. Through Monbi.com you can also upload your pitches and have interested Angels and even VC’s take a look at it.
Once you’ve made contact with your potential investor, set a formal meeting with him/her. This meeting is critical as most entrepreneurs only get one chance to pitch their business to an Angel. Making a successful pitch can make or break your chance of getting funding from an angel. If the pitch goes well, there will often be a next meeting to discuss the next steps toward financing. Otherwise, it’s best to start looking for other Angel contacts and improve your pitch.
If the Angel expresses interest in your business idea, you may have to officially confirm the amount of financing that you can obtain from them. Though the funding is not yet final at this point, it is important to at least ensure that the investor you are spending your time with has financial strength to back you up with the amount of investment you need. During this period, your business will be evaluated — references checked, books verified, and product and market validated. If the evaluation goes well, discussion of the terms of association is the next step. Give the angel a copy of your business plan. It is important to discuss the investment details, your plans for the business’ growth and the exit strategy for the angel. The exit strategy should include the terms of withdrawal of the angel’s money — including the dividends, salaries and fees that need to be paid.
If the angel wants to actively take part in running the business, it is best to establish the extent of his/her involvement and responsibilities. Discuss how the Angel can monitor the company’s growth and performance.
During the discussions, angel investors may have several questions for you. Provide them with details of your finances with the help of your accountant. If in instances where legal documents need to be procured, for example if an angel asks for legal warranties to make sure that the documents and information that you gave him/her is true, seek legal assistance. At this point, all key agreements and issues must be in writing.
C. HOW TO FIND AN ANGEL INVESTOR REFERRALS FROM FRIENDS, FAMILY OR BUSINESS ASSOCIATES WHO MIGHT KNOW AN ANGEL
You’ll never know but your banker or lawyer may have a client who is an accredited Angel investor. A personal referral from someone that an Angel knows may even make it easier to approach the investor and secure the financing. Angels and Angel groups are also more likely to invest in businesses recommended by people they know and trust.
NETWORK WITH OTHER ENTREPRENEURS
Gain contacts by joining industry specific Monbi.com networking events, organizations, attending conferences and business events. Get to know established entrepreneurs who might be Angel investors as well or discreetly find out about entrepreneurs who may have been financed by Angels. GO ONLINE AND CHECK OUT ANGEL GROUPS BASED IN YOUR REGION
Monbi.com provides a fast and easy way of locating potential investors. Monbi.com has a directory of Angel and Venture Capital investors from all over the world. Be sure to check out Angels based in your area first since there are Angels who only make investments on businesses based in their locality. Monbi.com also serves as a global platform where entrepreneurs can upload pitches for angel investors and Venture Capital firms to see.
BUT, THERE IS A BIG BUT. Before you start contacting and setting up meeting with Angels, it is best to first focus your search and identify angels who are compatible with your business. This will not only save you time and effort but also increases your chances of getting funding.
Some angels invest only in a certain industry. Since many angels are previous entrepreneurs themselves, they are likely to favour making investments on businesses that are within their prior industry experience. Angels also want to be involved in the business they are financing. Hence they are more inclined to make investments in businesses that are within their region or with headquarters that are relatively easy for them to access.
D. ADVANTAGES AND DISADVANTAGES OF ANGEL FINANCING
ADVANTAGE: Business agreements are more flexible
Since Angels are using their own capital to make investments, they often have negotiable business terms and can make investment decisions much faster. Angel investors are not answerable to a board and often have much less stringent terms than banks and venture capitalists.
ADVANTAGE: No Debt Financing
Compared to loans and other credit financing, angel funding doesn’t require a monthly payment which is crucial, especially for entrepreneurs who have yet to establish a business with functioning operations and a consistent source of income.
ADVANTAGE AND DISADVANTAGE: Angels often share their expertise and connections with the company even if it is unsolicited.
Many Angels are also successful entrepreneurs and they often bring with them expertise and connections that are very much needed during the crucial early stages of a business. Given their interest in the success of the company, most Angels would want to be involved in how the business is being run. Although the help and assistance that Angels provide are made in the benefit of the company, this might be a problem,especially for entrepreneurs who are used to being solely in control.
DISADVANTAGE: Limited Funding range
Angel investments may be more suitable for small to mid-size companies looking for start-up capital or additional funding to infuse with their bootstrapped capital. Investments made by angels are limited by their personal finances. Angel investors usually invest in amounts only up to $500,000 while Venture capitalists prefer to make larger investments that may range from $5-10 million per transaction. Amounts may verify depending on each situation.
DISADVANTAGE: Less transparent than Venture Capitalists
It is generally harder to research and contact Angel investors compared to venture capital firms. Angels are individuals who invest their own money unlike venture capital firms who are required by U.S. Securities and Exchange Commission to fill out informational disclosures.
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