Until the mid 1990s, entrepreneurs who were looking out for angel investors had to find investors one at a time or in small groups. Though some unofficial groups of investors had already formed around the country, there were complete no groups that the entrepreneurs could easily approach for investments until the launch of Band of Angels in Silicon Valley much later in the decade.
During this time frame, venture capital firms were making smaller numbers of seed stage investments and focused on larger investments in enterprises that had already gone all the way through the start-up stage. Entrepreneurs found it quite difficult to attract venture capital leaving them reliant on families, friends and angel investors. On top of that businesses had to raise a greater amount of money as the lowest threshold for venture capital had increased from $3 million to $5 million.
When looking out for seed capital to get started up with a business enterprise, an entrepreneur usually takes diverse avenues in search of funding. Small as well as midsized start-ups often look out for funding from the angel investors – private business people who can instil hundreds of thousands value of capital into a business enterprise. The benefits of any particular angel investor may be assessed with the help of established business contacts prior to the investment being made.
Mentioned below are few reasons why angel funding is a golden opportunity for investment houses:
- Can provide the required capital for the establishment – When the entrepreneurs have exhausted investment from friends and family members, bank loans, credit cards and personal savings for their business, they may look out for angel investors to facilitate them to fill their required equity gap. Angel funding capital can facilitate them with a great source of funding for a new business to get started up.
- Capability to raise capital in lesser amounts – Most of the early staged businesses require quite a small amount of money, usually less amount than $500,000. Angel investors can often offer the required amount by making use of their own personal funds for the investment.
- Flexible business contracts – Angel investors hold an informal investment criterion in comparison to the conventional financial leaders which includes venture capitalists and funds. As they are investing their own money, the business deals can often turn out to be negotiable. Due to this kind of flexibility, they can be outstanding sources of capital for early-stage industries.
- Can get vast knowledge as well as experience to a new company – There are many angel investors who were entrepreneurs at one point of time and who have established many successful organizations under their leadership. An angel’s resources as well as insight are of incredible value for an organizations’ success, and therefore an entrepreneur should always understand the known ways to get help, embracing the contribution of their angel investor in everyday big business activities.
- Involved in high risk investment – An Angel investor’s capital in a new business is often considered to be an investment that is associated with high-risk. This is only because the newly set up company has not embraced the solid path of success. As they provide the initial funding for a new company therefore, it is difficult to understand whether their business will be successful in the long run. Apart from this it is found that new business enterprises fail to stand up in the initial years of establishment therefore, they are quite optimistic on their investment options. They also request for a large amount of return to counterbalance the risk that is associated.
- Does not need high monthly fees – Another advantage from raising angel capital is that you will find no due payment charges for instance, the ones that credit cards and the bank loans involve.
- Community involvement – There are many angel investors who wish to invest locally. The capital they invest for the set up will not only gear up the new enterprise but also create job opportunities and facilitate in the growth procedure by encouraging the customers to buy their product.
- Located everywhere – Apart from traditional financial centres Angel investors are found everywhere. They invest in every market these days.There are many industry specific investments associated with it also.
So, this is how Angel funding is a golden opportunity for the investment houses.
Donna Baxter is a financial planner cum special writer for Fisher Investments UK and has been advising people about their money management since 1994