What is angel investing? It seem as though this particular phrase has gotten quite a lot of attention in recent years and has become the buzz words of alternative small business funding. The “angel” in this scenario is the investor – the person who provides capital for small business start-ups. First, let’s examine the technicalities of such investment relationships.
Angel investors are essentially private money lenders; the funds that they provide – as in my case – are from their own capital funds that they have allocated for investment in start-up businesses. This is not to be confused with venture capitalists who manage a pooled collection of funds provided by multiple investors. Further, it is not the same as investment brokers who connect start-up businesses with third-party funds in exchange for a fee. Angel investors are dealing with their own money and, as such, there comes a greater ownership in the process.
Why is this something that an investor would want to do? There are several reasons that angel investing – from the investor’s point of view – can be a sound financial decision. For one, these funds are allocated for investment purposes and what better way to diversify your portfolio than to invest in a variety of lucrative industries? Further – rather than traditional loan repayment terms – private investors provide funds in exchange for equity in the company in which they are investing – or in exchange for a convertible debt, in which the debt is converted into shares of the company within a set number of years. Surely, there is much risk associated with angel investing. However, provided that the investor is smart and is able to fully vet the potential of the start-ups that they consider, the rewards can be just as great.
So what benefits does angel investing offer start-up businesses?
Acquiring funds through angel investing provides start-ups with flexibility and – in some cases, essential tools – that they would not receive through traditional loans. For one, private money lenders are able to offer loans of any amount of their choosing – there is no set limit. Additionally, the investor has a vested interest in seeing that company succeed in the long term and they will often bring their expertise to the process; not only helping businesses launch successfully, but also preparing them for continued growth.