Angel investor
A new innovation is always met with some amount of skepticism. Friends and relatives politely listen to inventor's belief in his invention and his expectations of commercial benefits from it. But when it comes to investing in a startup, few would put their hard earned money on a project that may not take off. Sometimes, however, these friends and relatives may genuinely not be able to pool adequate resources, even if they had full faith in the discovery. This leaves inventor with little choice but to sell his precious discovery at a throwaway price to some large corporate house that understands the value of invention, but is in a better position for bargaining the price. There is, however, an alternative. There are high net worth individuals who are willing to take such risks, at a price of course. Such individuals are known as angel investors.
Salient aspects of angel investing are : .
- The investors invest the required amounts after studying the invention and understanding the projected cash flows.
- The funds they invest are essentially their own.
- By investing the funds, they are able to monitor the project. This does not mean that they partake in every activity. It means that they can question any act of the inventor entrepreneur and offer their suggestions. They generally have good contacts and experience in such fields.
- As the risks are high, these investors bargain for higher rates of returns. Sometimes, the inventors agree to give almost 10 times the investment within a period of 5 years. Alternatively, angel investors stipulate that the inventor go for initial public offering within 5 years or repurchase the shares at a predefined rate. This is an exit strategy used by angel investors to safeguard their funds. Some angel investors may also seek to be partners cornering a hefty share in process.
- Generally, an inventor is able to raise around $200,000 from friends and relatives. This amount is known as seed capital. If the startup requires an investment of less than $1 million, venture capitalists would not come forward. This is where angel investors step in.
Major differences between venture capitalists and angel investors are : .
- Venture capitalists invest funds of other investors, but angel investors invest their own funds.
- Venture capitalists do not participate in day-to-day affairs, but angel investors may opt to.
- Venture capitalists charge lesser amount of interest on their capital than angel investors.
- Venture capitalists invest in projects requiring funds above $1 million. Angel investors are willing to finance smaller projects.
- Venture capitalists do not become eventual partners in the business. Angel investors may opt to do so.
Angel investments are generally used by healthcare services, and medical devices industry. Software startups and high tech industries are the other areas that seek such type of financing. Though the earnings of angel investors look astounding on paper, reality is far different. A number of startups fail to generate returns as projected. This forces these investors to absorb losses. On average, they could be earning only about 20 to 30 percent on their investments. Though this seems very robust, it is nothing when compared to what they had bargained for. .
Other Articles
