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Business angels are a great way to get funding for your project without taking on debt in the early days of your business. They provide financing, experience, and mentorship to your budding business, all essential aspects for a startup. Researching the role of angel investors can help you decide if this is the right path for you and your business.
What is a business angel?
A business angel is a private individual, usually with a high net-worth, who invests a part of their assets in new and growing businesses in return for participation in the company capital. They tend to have business management experience and can also provide mentorship, knowledge, and new contacts for the entrepreneur.
Business angels play a significant role in the economy, being the second-largest source of external funding in newly established ventures. Many angel investors are also increasingly starting to operate as part of a group, which significantly raises the potential for the level of investment.
Advantages of business angels
Angel investors offer many advantages to business owners to get their startups running.
Less risk than business loan: Business angels receive equity in exchange for financing and are usually experienced investors with a long-term view, being aware that they may not see a return on their investment for quite some time. The interest and monthly payments required for bank loans are not necessary: angels get a share of the profits that equate to their investment, and that is only after your business starts to generate them.
Flexibility: When compared to banks and venture capitalists, angel investors have more informal investment criteria. And their business deals are usually negotiable since they are investing their own money.
Mentorship: Many angel investors are also looking for personal opportunities in addition to investment opportunities and are motivated to see your business succeed. Their experience can offer invaluable insight and guidance. Research has shown that startups backed by angel investors are more likely to have substantial growth, experience a greater rate of return, and remain in business for a longer time.
Fill the equity gap: When all the funds you have managed to secure through personal savings or family and friends are still not enough to start your business, angel investors can help you fill the needed equity gap.
Disadvantages of business angels
However, there are some disadvantages to obtaining funding in this manner.
Loss of equity: Many business owners give away between 10 and 50% of their startup in exchange for funding. If the investor decides to take a more direct approach to the business, they may try to put a more experienced executive in your place or try to sell the company to a larger corporation. They also expect a substantial return on their investment, which can create additional pressure for you and any employees. After the initial investment, they don’t usually provide any additional funding.
Dubious intentions: Some angels may be only motivated by money and have no interest in promoting the growth of your business. They may not pay much attention to how a business is doing in the early stages of its development.
Before accepting funding, you should establish expectations for growth: both for you and your investor. And, more importantly, make sure you find the right investor for you.
How do you find business angels?
There are many ways to prepare your business for this kind of investment:
Make sure your company fits the profile. Startup financing has considerable risk, so investors usually look to multiply their investment by 5 to 10 times. Your company must have that kind of growth potential and a good record on bringing ideas to fruition.
Connect to other entrepreneurs in your industry and find out how they met their investors or work with an accelerator: any startup that has passed the selection process will be seen as a promising investment opportunity.
Make sure it’s a good match. Angel investments are long-term relationships, so once you have identified an angel you are interested in, research as much as you can about them. Platforms like Finnovating Marketplace are a great place to start networking and find potential investors.
Partnering with an angel investor can also give you more credibility: being associated with them will provide contacts for potential customers, investment bankers, other professionals, and marketplace knowledge that will be useful for you and your business. All of this you can also find in the Finnovating Marketplace platform. Whether you look for a business angel or not depends on your company’s goals and strategy. Angel investors usually like to be involved in the companies they invest in, so if that is something that appeals to you, look for investors who fit that description. This search is much easier with Finnovating: the first B2B matching platform in the FinTech sector. Its Marketplace allows you to contact directly with the players of the FinTech ecosystem.