Angel Investor FAQs

Q1. Why are they called angel investors?

Debt financing and equity financing are common sources of funds a business owner would think of when starting a new venture. When business loans, financial institutions, and other sources of funding however, turn their backs on unproven business startups, this is where angel investors come in. They are individuals or groups with tremendous liquid assets working to provide funds to aid startups especially during the period of business development. Some angel investors even become an angel investment network and venture capitalists with enough funding to help materialize risky business ideas usually started by a small business. They are referred to as “angels” because they provide angel funding on startups with high risks in exchange for some degree of ownership of the company usually in the form of equity. Moreover, angel investors sometimes provide more than just funds to a startup. They sometimes get involved in creating or expanding a company’s business strategy. There are angel investors that give advice to a company’s management team and may sometimes participate in monitoring operations and providing necessary connections to ensure high rates of return on their invested capital. Angel investors may be the answer you are looking for if you are planning on starting your business and if investor search is proving to be futile.

Q2. What is a good ROI for angel investors?

In a usual setup, an angel investor usually anticipates less than a 20-50% rate of return for their angel investment. This percentage range is the ideal figure for a business owner to target when aiming to raise angel funds and convince angel investors to invest in their business. While a high return on investment is ideal, angel investors are also realistic in calculating the return on invested capital.

The internal rate of return, or simply rate of return, required for every kind of investor including angel investors, venture capitalists, venture capital firms or any angel financing company is unique to them. An angel investor investment is a form of private equity paid to business startups so they proceed with business development. The rate of return or return on investment must be explicitly defined in a company’s business plan presented to angel investors or any angel networks.

The business plan is what entrepreneurs make when pitching their ideas to potential angel investors or sometimes an angel capital association. The business plan must contain an executive summary that effectively relays strategies and plans for a great business projection. Other important matters to consider before any prospective investor can evaluate the rate of return for their investments are pre-money valuation and seed capital association. However, it is not the most important and game-changing process in the field of business administration. It is the evident impact investment to materialize the business and the surge of value and ownership equity the business possesses in relation to the capital. Another powerful arsenal to gauge the rate of returns is unique business ideas in relation to business venture development, especially those that are aiming to dominate the market share for potential customers that truly disrupt competition. One of the primary virtues whether investing in startup businesses or seasoned businesses is due diligence to prevent other mistakes entrepreneurs make and prevent loss of money. The signing of a non-disclosure agreement and the review of the necessary legal documents by your legal team are also important matters to consider before negotiating the rate of return for angel capital in hopes of improving your private equity. It should also be the priority of the management team to keep track of the negotiations. They should always be vigilant to maintain a balance of looking up to the accredited investor’s money interest and how it is evaluated with other startup businesses in regards to their entrepreneurial undertakings. Having your management team monitor angel investors' investments could be challenging but the benefits will surely be rewarding in the long run.

Q3. How do you negotiate with angel investors?

The usual setup in the industry is that professional angel investors will accumulate a 20% minimum to 50% maximum of the company with regards to their funding. While this is the standard setup that is present in the usual cap table, one thing that business owners can negotiate is the amount angel investors receive as dividends. If there are reservations on your part as a business owner and you perceive that your angel investors are asking for too much of a percentage, then you should not hesitate to negotiate right after the management team's offer is first given. It is also essential that you clearly understand the terms of the possible impact of the investment of angel investors to the way you run your business, weigh in the pros and cons, consult your family and friends, conduct research on search engines, investment network of accredited investors, or social media platforms, and check the details before signing into an agreement and becoming part of the investment portfolio of angel investors.

Q4. Do angel investors invest in ideas?

Business ideas that seem feasible, have an effective business administration, a definitive mission and a viable timetable; can be something angel investors consider a priority to invest in. If the business plan is clear, concise, and understandable it could be very appealing to active angel investors. The transactions these active angel investors enter into are solely based on trust that their money will be effectively used as a means to improve business operations that will make a company profitable; and in return improve ownership equity and provide bountiful results for the angel investors. Of course, it is certain, that these angel investors require signs of potential and proof that you will be able to deliver the promised return by presenting a reliable cap table or ensure successful exits.

Q5. Why do angel investors invest in startups?

According to some related articles, diversification of portfolio companies and improvement of investment networks are the main reasons why seed investors or angel funders are interested in investing in startups. Despite entering into a very risky deal, angel investors also perceive this action as a very rewarding course if successful and would appreciate the fact that they are the primary source of funding that the business can rely on. On the other hand, there are angel investors that simply want to improve their investment profile or take part in unveiling new technologies, new business setups, and up-to-date ideas that could range from real estate up to the field of insurance companies. Whatever their goal is, it is important to understand the motivation behind these angel investors in order for you and your business to convince them to come on board. Once you understand the styles and strategies of these angel investors pitching your business ideas to them will be easy.

Q6. What makes a company attractive to angel investors?

Companies with a solid business plan and realistic and attainable projections are very appealing to angel investors and venture capital networks. Another important factor is the charisma, experience, skills and dedication to the profitability of the founder. If a seed investor finds a certain invention or technology of various founders to be disruptive in the competition, they will also be interested to initiate contact to serve as an addition to their investment profile. At present, many angel funders or angel investors serve as primary drivers for the success in Silicon Valley as it is known to be the home to many startup technology and real estate companies that have reached international business status. Angel investors also invest in novel ideas with a potential to solve relevant problems and in turn change the world. Altruistic angel investors sometimes even invest in non-profits that solve community problems. It is important to understand the kind of angel investors you will be pitching your ideas to.