Finance
What are Angel Investors? Understanding the Role and Impact on Startups
Angel investors are invaluable to many startup businesses. Basically, these are private individuals who specialise in investing in startups or businesses that are in their early stages. Of course, this isn’t done out of charity. Instead, the investors look for equity in the business in return for their investment. The difference between these investors and venture capitalists is that the former are using their own fund. They are high worth individuals who, usually, have a real passion for business.
Angel investors are a lifeline to startups as these businesses are not usually at the stage where they can attract more traditional forms of investment. As well as offering funds, these investors will also provide guidance and support to boost the chances of success, and to secure their returns.
Why are Angel Investors Important?
There are several reasons why angel investors are so important to businesses in their early stages. Let’s take a look:
- Early stage funding: Angel investors get involved at early stages when traditional financing options are inaccessible. The funds that come in at this time help businesses to build prototypes, hire team members, and launch marketing campaigns.
- Mentorship: It’s not all about funds. Angel investors are usually highly experienced entrepreneurs in their own right. This means that they have the experience to mentor and guide startups so that they avoid common mistakes.
- Networking opportunities: Angel investors have extensive networks and startups can quickly gain access to these. These connections can be invaluable and often bring more benefits than the financial investment itself.
How Angel Investors Work
Angel investors work in various ways depending on the type of investment that they want to make. Often, they have moved away from traditional investment opportunities, such as stocks and shares, and enjoy the challenges that come with new businesses.
Types of Angel Investments
Investments from angels can be structured in a variety of ways. Here’s a look at the most common:
- Equity investments: This approach sees the investor take a percentage of the company into their ownership in return for the funds they invest. This means that there’s a vested interest to push for the startup to be successful.
- Convertible notes: These are short-term loans, and they convert to equity later on. This conversion will usually take place during a round of funding. The pro here, for the investor, is that they can delay valuing the businesses until it has gained more traction.
- Revenue-based financing: This works by allowing the investor to receive a percentage of the startups future revenue until the investment has been repaid. This is a great option when there is predictable cashflow.
How to Approach an Angel Investor
Before you can seek investment from an angel, you need to be sure that you’re prepared:
- Develop a solid business plan: This is a must for you to demonstrate the potential that your company has. Look to show growth opportunities, profitability, market analysis, and a clear roadmap.
- Identify relevant investors: If you’ve ever watched Dragons Den or Shark Tank, you’ll know that certain investors are attracted to certain sectors. You need to find the ones who understand the sector that you’re operating in.
- Perfect your pitch: Your presentation needs to full of the right detail while remaining concise. You need to demonstrate that you know your business, and your industry, inside out. This includes having a solid hand on the financials.
- Leverage your network: A personal introduction can give you an advantage. Be open about what you’re looking for and ask your network for help.
Trending Industries for Angel Investors
Angel investors will be targeting industries where they know that there’s the real potential for growth. Here’s a look at the ones that they’re looking at right now:
Tech and SaaS
Technology and software as a service (SaaS), have long been a top target for angel investors. With SaaS, the appeal comes from the scalability and recurring revenue model. This is also about emerging technologies, with the likes of AI, cloud computing, and blockchain all attracting significant investment from angels. These are technologies that have the potential to reshape a host of other industries.
HealthTech and Biotech
These industries are addressing challenges that are significant around the globe. The accessibility of health care and medical advances hold real appeal for investors. The recent pandemic has demonstrated why these will always be areas of growth and the popularity of wearables is also boosting this.
GreenTech and Sustainability
Climate change is clearly on the agenda around the world. This means that there are also plenty of opportunities to make money. Renewable energy, waste management, and carbon reduction are all areas that are thriving. This sector is all about the long-term and that means that investors have some security in knowing that these companies are needed by us all. The demand for these companies is never going to disappear but, as a relatively new industry, the competition is fierce for startups.
iGaming Industry
The iGaming industry covers the likes of online casinos, sports betting, and virtual betting. With a boom in the number of online casinos, and the explosion in the number of games, there’s a need for seamless casino API integration. Key players, such as hub88.io, have demonstrated to angel investors that this is a market that’s experiencing rapid growth.
E-commerce and FinTech
E-commerce and financial technology (FinTech) are transforming how we all shop, and how we manage our finances. Angel investors are attracted to startups that are looking to innovate payment processors, the personalised shopping experience, and financial inclusivity. Platforms that are offering buy-now-pay-later and mobile wallets are particularly attractive.
Benefits of Angel Investing
Angel investors are a great option for startup businesses. Here’s a look at just some of the benefits that they offer:
Financial Support for Startups
Angel investors are a great source for the funds that a startup needs. Money can be secured for:
- Launching operations
- Developing products or services
- Expanding into new markets
Investment at such an early stage can often be the difference between success and failure. Without funding, it becomes difficult to get to the next level.
Mentorship and Networking Opportunities
There’s more to angels than just the financial support. Just as, if not more, importantly, they also offer:
- Strategic mentorship: The experience offered by angels can help new business owners to reassess their strategies. An angel’s guidance can help a startup to fine-tune its plans and to avoid costly mistakes.
- Industry connections: Angel investors have already had years to build an extensive network. When they invest in your business, they also include you in this. You suddenly have the opportunity to mix with people with high net worth who can offer advice or even funding at a later stage.
While the funds will always matter, using angels for feedback is just as valuable. This feedback can change an approach to business and improve decision making processes.
Risks and Challenges
While there are plenty of benefits associated with angel investors, there are also risks and challenges to be aware of:
High Risk of Failure
There’s no escaping the fact that investing in startups is a huge risk. The reality is that many startups don’t make it into profit and fall away during the early stages. Angel investors need to be comfortable with this level of risk, but startups also need to be prepared for intense questioning before funds are committed.
Finding the Right Investor
This works both ways. The coming together of a startup and investor who have different goals and priorities can create an environment that’s impossible to work in. Startups need to find investors where goals are aligned, and values are shared. There’s also the need to prioritise expertise and connections above capital. These are what can make a real difference to the success, or otherwise, of a new business.
Balancing Equity and Control
New business owners also need to consider what investment means. While funds will be hugely beneficial, they mean that ownership, and control, are diluted. Founders need to make sure that they’re comfortable with the terms that are presented and that they maintain sufficient control.
Final Thoughts
Successful startups would be few and far between without the existence of angel investors. It’s not just the funding that’s desperately required, but also the mentorship and the strategic insights that are offered.
If you’re considering approaching an angel, you need to be sure that your industry is one that will appeal. High growth areas that are teeming with innovation are the ones that stand out. These include the likes of health, FinTech, iGaming, and GreenTech.
Before you make the approach, take the time to prepare. You need to demonstrate that both you and the business are worthy of investment. Know your figures and, more importantly, know who you’re pitching too.
When you have an understanding of the role that angel investors play, you have a much-improved chance of leveraging the advantages that they offer. They can play a vital role in your future success.
