Author : Ilona Milostnaja
Date of publication: 23/07/2023
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To go from a startup to a multi-million dollar business, you need funding. A prime example is Apple. They started their journey in the garage of one of the founders - Steve Jobs, but then received funding from a business angel. When and how business angels can help, you will learn in this article.
Who are business angels?
Business angels are private investors who are ready to invest in startups at the earliest stages, taking an active part in business development. Despite the huge risks, business angels still expect to receive a return on their investments, which distinguishes them from philanthropists. So, they can invest both individually and as part of a syndicate.
Historically, the concept of a business angel is close to a philanthropist because it originated in the theatrical environment. In the early 20th century United States, these investors were called generous backers who rescued failing Broadway productions. Usually, they did not count on profit but simply helped with their love for art.
In relation to business, the term "angels" began to be used thanks to William Wetzel. He is known as a founder of the Center for Venture Research and a professor at the University of New Hampshire. In 1983, his article “Angels and Informal Venture Capital” was published, where he first coined the term to describe investors who invest in start-ups. Since then, struggling start-ups and companies have sought assistance from those willing to support them despite the significant risks involved.
How business angels differ from ordinary investors
There are many ways to become an investor. For example, buying shares and becoming a shareholder is how an investor invests in the development of a company. But his rights and opportunities will be limited depending on his stake in the company. Another way is to invest in a fund, where managers will choose assets with the expectation of making a profit for investors.
Venture funds work in a similar way, only they invest in companies that need funds to start or the next stage of development. An important difference is that a venture fund determines in advance what type of company it invests in and on what terms.
Business angels, on the other hand, can invest on their own, they can choose a startup at their own discretion and set their own conditions. Actually, for the company, this is a plus. Relations with private investors are more flexible than with venture funds with a set of rules and strict conditions.
Features of Business Angles
We can note the main distinguishing features of business angels:
● invest their own money;
● choose projects in the innovation sphere;
● can make choices based on their own knowledge and experience in the industry;
● may invest in a company in a “dead zone”, which venture funds are likely to refuse;
● they do not count on receiving operating profit. They invest in the expectation that, if successful, the capitalization of the company and the value of their share in it will multiply;
● help the company not only with money, but also with connections, recommendations, and advice.
How to find a business angel
For a startup or a company, it is important to choose a business angel who won’t only invest money. In fact, choosing a business angel is crucial for startups and companies. They shouldn’t only provide financial investment but also offer valuable experience, connections, and avoid imposing excessive conditions. So, in order to understand that you have exactly the right person in front of you, you can pay attention to the following features:
Industry experience
It is better to look for a business angel with experience in investing in the industry in which the startup operates. They have useful connections and may be more interested in the deal;
Investment experience
A new start-up founder is better off dealing with an experienced investor, not a beginner;
Financial stability
So that there is no additional burden on a startup and additional risks. It is worth considering the financial condition of a business angel so that he can invest funds without potential problems in the future;
Mentoring experience
Business angels can act as an advisor, in particular, to help navigate the stages of financing. If necessary, this factor can also be considered.