Could an angel investor make your dreams come true?

An angel investor may not have wings or a halo but she could make your dream business a reality. An angel investor or business angel is someone who provides seed capital and mentoring to start-ups and growing firms in return for a share of the business. As Prowess reported last week, the number of female angel investors is on the rise.

What’s in it for you and the angel investor?

Many angel investors are retired executives or business owners who not only fund new businesses but also mentor new entrepreneurs and may also be a good source of useful contacts. So you get both an investor to fuel your dreams and a mentor to show you the right direction. Due to the high risks involved in a start up, an angel investor will often expect a high return on investment. There is often a defined exit strategy in case a company’s performances are not as per expectations.

Are venture capitalist and angel investor same?

Venture capitalists are quite different from angel investors. They are more interested in funding the expansion of companies in their growth phase than new start-ups. One important difference between Angel Investors and VCs is that VCs’ invest pooled money from other people and not their own funds. Also venture capitalists generally demand a more controlling say in the business of the company that they invest in.

Questions the entrepreneur should ask

  • How much time, guidance and money the angel can and will invest?
  • What are the other investments that he/she was involved in and if any of them failed?
  • Besides funding, where is the value–add, is the angel entrepreneur-friendly?

What kind of relationship should angels and entrepreneurs share?

The relationship between an entrepreneur and their angel investors is much like a marriage in which open communication is crucial for its success.  It starts when the entrepreneur finds an angel investor to fund their business endeavours. And it is an ongoing dynamic relationship that the investor and entrepreneur share. This relationship is defined by honesty, trust, and open communication among both parties. Entrepreneurs and investors should discuss and mutually agree upon the level of involvement expected from the investors. To ensure a working chemistry between the two parties, their roles should be clearly defined and principles should be compatible.

What should be the time period for investment?

The goal for angel investors is to provide capital seed funding for early stage companies with the promise of a good return. Researchers suggest that an angel investor should not be tied to any financial commitment with a company for more than three to seven years. In a good exit the angel will see a solid return from the sale of their share. Often shares are sold back to the business owner, or another investor. Sometimes both parties agree that it’s an ideal time to sell or merge the business.

Can you become a business angel or gain angel investment?

With angel investors more likely to invest in people who remind them of themselves, the recent rise in the number of female business angels has to be great news for women in business. And with more women succeeding in business, it’s set to become a virtuous cycle. To become a business angel you need to have funds available to invest and good business knowledge or experience. Professional experience in banking, insurance and finance in the past is an advantage and so is experience of running your own business. If you’d like to find out more about investing or gaining investment the British Business Angels Association is a good place to start. You may also like to check-out the Prowess guide to female business angel funds and communities.

Author: Ruchi Gupta is a marketing professional who writes about finance and business.

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