What are business angels?

Business angels are wealthy individuals who invest in startup and growth companies in return for equity in the company. The investment can involve both time and money depending upon the investor.

Typically business angels have already made their fortune through other business ventures, possibly their own startup or a career in business. Most are men aged between 45 and 65. However, investors can be younger – particularly in the technology sector. Business angels can operate independently or as a syndicate. Angel investors look for companies that exhibit high-growth prospects, have a synergy with their own business or compete in an industry in which they have succeeded.

The term covers a wide range of individuals investing varying amounts of money at different stages of business development, according to George Whitehead, of The Oxford Investment Opportunity Network (OION). In general there are six different types of investor:

Virgin: Has not yet invested
Latent: Has not invested in the past three years
Wealth maximising: Experienced businessmen and women investing for financial gain
Entrepreneur: Backs businesses as an alternative to stock market investments
Income seeking: Invest for income or to gain a job
Corporate: Companies that make regular investments, often for majority stakes.

What can they offer?

Business angels are a vital tool used to fill the gap between venture capital and debt finance – particularly for startup and early stage companies.

They also provide a useful source of equity finance – where the investor takes a stake in the company in return for a cash injection – for relatively small amounts that would not otherwise be available through venture capital.

Investments can be anywhere between $20,000 and $500,000 although in practice most investments are in the region of $50,000. In addition to a first investment, business angels often follow up with later rounds of financing for the same company.

As well as cash, business angels can offer years of experience in the business world. Although some prefer to become a sleeping partner, others will get actively involved in your business from writing a marketing plan to taking the company through a flotation on the stock market.

Capital from angel investors is likely to cost no less than 10 percent of a company's equity, and, for early-stage companies, perhaps more than 50 percent. In addition, many angel investors charge a management fee in the form of a monthly retainer.

Financing from angels is appropriate for early-stage companies with no revenues, or established companies with sales and earnings. Companies seeking equity capital from angel investors must welcome the outside ownership, and perhaps the surrender of some control. In addition, to successfully accommodate angel investors, a company must be able to provide an "exit" to these investors in the form of an eventual public offering or buyout from a larger firm.

The supply of angel investors is large within a 150-mile radius of metropolitan areas. The more technology-driven an area's economy is, the more abundant these investors are.

Source: startups.co.uk


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