When a person wants to become an entrepreneur and is ready with a business plan and he has carried out the market research and is confident that his business will be a successful one. Then he thinks of the capital that will be needed to just start up the business and puts in all his money, collect from all the sources like friends, relatives, family etc. but still all the money put together won’t be sufficient. He approaches banks and if that happens to be a recession then the banks won’t even let him to explain his business plan. If he approaches venture capitalist they say that the seed capital that he is asking for is too low for them and they are not interested in that particular business plan. Then enter into picture those who are known as Angel investors.
Angel investors are wealthy individuals who help the entrepreneurs during the starting phase by providing them the seed capital (in our last article about the venture capitalist we have understood that seed capital is nothing but the capital that is required and utilized in starting up of business). An angel Investor can be any one like your Friends, Family or Fools because they wont give more importance to your business model, they will give importance to the person who is starting the business. The Angel Investors are usually the entrepreneurs who like to help the upcoming businessman not only by providing the capital but also giving valuable suggestions. Some people often get confused with two concepts Venture capitalist & Angel investors, so before starting with the discussion about angel investors we will have a look at some of the differences.
Difference between Venture capitalist & Angel investors
· In a startup business the angel investor comes into picture earlier to venture capitalist
· Angel investors are worthy individually whereas the venture capitalists are more or less corporate firms
· The angel investors provide capital to the startup company during the seed or concept stage financing whereas the venture capitalists are provide capital starting from first stage
· The amount of capital provided also varies. The angel investors provide capital starting from 25,000$ to 1,00,000$ (this is not an exact amount as they may be providing more or less depending on the amount that they have), on the other hand the venture capitalist start funding from 1,00,000$ and the upper limit cannot be exactly said.
· The process of obtaining funds is less rigorous in case of angel investors and very rigorous and takes a long time in case of venture capitalist.
· The conditions put forth by the venture capitalist are more stringent than the angel investors.
These are some of the differences but it cannot be said that these are applicable to all the angel investors and venture capitalist, because the way of doing business is different from one person to another.
Types of Angel Investors
Following are the major types of Angel Investors;
- Core Angels
- ROI Angels
- High tech angels
- Entrepreneurial Angels
- Corporate Angels
They are individuals who have a vast amount of knowledge about the business and have successfully owned business. They have an investment portfolio and invest in different industries.
ROI stands for Return on Investment. They are type of angel investors who are more interested in risk return trade off or the returns that they want to get for the investment made. They also hold diversified portfolio and do not invest if the marketing is not doing well and invest if its stable and showing improvement.
High tech angels
This kind of angel investors may or may not have lot of experience in their kitty but they are more interested in investing in the projects involving the latest technology. They are responsible for introduction of new technology in the business.
They are successful entrepreneurs who own their business and have the experience. In order to help the upcoming entrepreneurs Entrepreneurial Angels take up the role of investment angels.
They are former executives of large business organizations who have enough experience. Their main objective is to earn profits and they also ask for their involvement in that business.
Apart from the above there are many types like Enthusiast Angels, Micromanagement angels, Professional Angels, Head Angels, Mentor Angels etc.
What do angel investors expect in return
No doubt the angel investors are more exposed to the risk because they are investing in a business just because they have a gut feeling that the business plan will work out whereas the venture capitalists invest only in those business who have got a startup and need to scale up their production (but the amount invested by venture capitalists is far higher compared to Angel investors). In return the angel investors ask for
- 10 to 30% returns on their investment over five to seven year period
- Some of the angel investors demand for an active role for them in the working of the firm and some others are just quite opposite and are not at all interested in working of the firm.
This is one stage I must say which is very crucial because this is the stage where the investor evaluates your business, decides as to how much he is going to invest and puts forth the conditions. The last part of the previous sentence is responsible in calling off of many deals. In case of the venture capitalist one common thing observed is that irrespective of the funding that they provide they will demand 50 or 51% stake. The angel investors also do not lag behind and put some stringent conditions because the seed capital that they are providing is as important as first or second stage funding although it is less compared to first and second stage funding.
Effect of financial crisis
The economic downturn affected most of the businesses and angel investing is no exception to that. A study conducted by the University of New Hampshire in 2008 the angel investors in US put in $19.2 bn which is 26.2% less than their total investment in 2007 & total number of projects they backed was 55,480 a decrease of 2.9% from the previous year.
Angel investors in India
The angel investors more than often are successful entrepreneurs who have built their company and are operating successfully. The venture capitalist help entrepreneurs shape business models, create business plans and connect to resources, but without stepping into a controlling or operating role. India is one of the fastest growing economies and as a result of that not only the domestic but also angel investors from other countries are interested in investing in startup businesses in India. It was the internet boom of 1990 which made thousands of techies to move to America in search of opportunity and that’s what is happening in India now. The software industry and many other industries are growing at an exponential rate that is why it is attracting many investors.
There are many angel networks like Chennai Fund, Indian Angels Network, Mumbai Angels, TiE Entrepreneurship Acceleration Program etc. There are some individual angel investors to name a few are Praveen Chakravarthy, Ranjan Kapur, Bobby Bedi, Swaminathan S, Aadesh Goyal, Anil Godhwani, Arun Seth, N S Raghavan, Kanwal Rekhi.
It might be interesting for you to know that the information technology has provided such a platform for the Indian entrepreneurs that founders of international companies like Yahoo and Google seek out investment opportunities in India. The angel investment in India is on the rise and some of the reasons for that are:
- The number of entrepreneurs coming up with good business plan is on an exponential rise. It is increasingly becoming difficult for the angel investors to select between numbers of projects which have been submitted for funding.
- India is experiencing information technology boom. Although there was a slump in the previous year the software industry is going back to normal ways of doing business. The recent news of America getting out of the recession is a good indication.
- The technology is improving day by day and hence the requirements of the people too.
- The economic growth in India is one factor which acts as an inspiring factor to start up a new business.
Tips to obtain funds from angel investors
- We will start with a business plan. Let your business plan be a proven one. It only means that the business that you’re planning should have a market demand. You should have done a lot of research before finalizing the business plan.
- It doesn’t mean that angel investors won’t entertain nascent ideas, but it becomes your task to convince the angel investors that the idea can work out. Irrespective of whether your plan is new or old you should have done a thorough market study because that will be one important thing which can prove that whatever you are trying to do will really work.
- Register yourself in some of the portals which are exclusively for the entrepreneurs. Some of the websites even give you a list of the angel investors. But a word of caution is that some of the websites will give you an option of uploading your business plan, this is where it becomes difficult because you never know if someone copies your business plan.
- Many states have forum for investors (for both angel investors, venture capitalists) one easy thing is to get yourself registered.
- Attending seminars, reading articles written by the investors will be definitely be helpful because we get to know as to what are their preferences.
- Approach an entrepreneur who recently got funded by an angel investor and talk to him and obtain as much information as possible because it will be of some use for you while finalizing your business plan or while presenting it to the angel investor.
- Develop the habit of writing the article to a website or to a newspaper because that is one way by which you will be noticed by them.
- If you have approached many angel investors and have been rejected then try to know as to what was the thing that they didn’t find appealing or interesting in your business plan.
- If you are approaching an angel investor then don’t forget go through his choices, area of interest, the business that he has funded before (if possible)