Arijit and Shoma are the founders of a biotech and genomics startup where Indians can avail of molecular diagnostics and genetic testing services to get more information about their underlying health conditions. While both Shoma and Arijit had a clear vision for the future of their business, they knew they needed capital to be infused into their dream venture for it to hit the ground running. But how would they get funding for their startup? As it was a fledgling business in its nascent stages, the founders were aware that acquiring venture capital might not be easy. The path ahead of them became clear: they needed angel investors.
Shoma and Arijit secured a meeting with Yashika, a former co-founder of an angel investment fund for startups. Their vision was ambitious, but they went in with conviction, a well-written business plan and years’ worth of extensive research. By the end of the meeting, they’d convinced Yashika of the viability of their venture.
With the seed funding, also known as angels funding, the biotech startup was able to collaborate with several hospitals to study their patients’ genomes and gather valuable data to create medical products. Soon, the venture was able to hire over 200 researchers and geneticists across India, and even set up a research laboratory. Two years down the line, the company was able to secure crores’ worth of funding from a venture capital firm: a feat that may not have been possible if the startup’s founders hadn’t first managed to get that crucial angels funding.
What Is An Angel Investor?
From the example above, it’s clear that for founders of startup businesses in their early stages, seeking capital from people who are angel investors is a good way to get funding, often without having to worry about taking on debt. But to understand how angels funding works, it’s important to get a clear idea about the meaning of ‘angel investors’. So who are angel investors? Simply put, angel investors are individuals with exceptionally high net worth who infuse capital into small businesses, usually in return for an equity stake in the company. Angel investors for startups might just make a one-time financial investment or continue to provide funding for the company through its difficult early stages.
While trying to understand the ‘angel investors’ meaning, it would be interesting to look at the origins of the phrase. It’s said that the term ‘angel’ first came from New York’s Broadway theater to describe wealthy people who funded theater productions. The money put in by these affluent individuals was fully repaid with interest after the productions began to generate revenue. But it was William Wetzel, the former founding Director of the Centre for Venture Research, who came up with the phrase ‘angel investor’ in the 1970s to describe people who provide seed capital support to start-up businesses. He did so after studying how entrepreneurs raised money for their ventures. With this insight into the phrase’s origins, it becomes easier to understand the meaning of ‘angel investors’.
Angel investors for startups are usually looking for higher returns on their investment than they’d be likely to get from the stock market. But their motivation for investing in startups isn’t restricted to just financial returns. Lots of angel investors are retired entrepreneurs or successful business people who want to keep abreast of the goings-on of the world of business while also making money on the side. These investors are driven to invest in innovative startups with potential; many of them also wish to mentor young entrepreneurs who want to create successful businesses and even empires.
Now that we’ve answered the question, “what is an angel investor?” it would be a good idea to look into the types of people who can be angel investors as well as explore the different sources of angels funding. Let’s get into it.
Types Of Angel Investors
While it’s known that angel investors provide capital for startups, their distinction from venture capitalists must be kept in mind. Unlike venture capitalists, the funds provided by angel investors usually come from their own money. Moreover, angel investors need not necessarily just be one person. Let’s take a look at the different forms in which angel investing can happen.
1. Family And Friends
Some of the most successful business owners in the world were initially able to get their ventures off the ground on account of the seed capital they received from their wealthy families and/or friends. Investment from family members or affluent friends is known to be the most common source of funds for startups, with business owners seeking support from these quarters first.
2. Professional Angels
Startup owners will know that high net worth individuals looking to inject large amounts of capital into a new business need not just be successful business people; depending on the business, they can also be doctors, lawyers and so on. As long as they believe in the business, such individuals will often be willing to put large sums of money into a venture in exchange for an equity stake.
3. Angel Groups
These can also be called angel investing companies. It’s becoming common for individuals with high net worth to come together and function as part of an angel investing group, as by doing so they’re able to increase the investment amounts exponentially.
4. Entrepreneurial Angels
Several angel investors for startups have their own highly successful ventures which generate the sort of revenue that would allow them to risk investing in startup businesses. This category of angel investors is usually just interested in helping young entrepreneurs launch their businesses; they rarely want to be directly involved in the company operations.
To recap, unlike venture capitalists, who fund businesses by using money belonging to their own wealthy clients, angel investors usually give startup businesses their own money. There are several sources from where these funds are drawn. It could be money from another business, a trust, a limited liability company or even an angel investment fund. As described earlier, angel investing companies are organizations that put capital into new businesses; such money could be anything between several thousand dollars to a few million, but rarely more than that.
Angel Investors: The Right Choice?
For startup owners, there are several advantages to getting an angel investor on board. Here are some of these advantages.
- Reduced Risk: There’s no need to pay angel investors their money back as they’ve already got an equity share in return for their funding. Moreover, such investors usually tend to be patient regarding returns, owing to their experience in playing the long game in business
- Mentorship: The level of experience mentioned above leads to angel investors being able to provide valuable guidance to startup owners. According to research, small businesses supported by angel investors show more growth and profitability and have a relatively lesser chance of failing early
- Industry Contacts: Building a network and good business relationships is key to a business’s survival. A good mentor angel would create opportunities for startup owners to meet and forge good relationships with lawyers, investment bankers and other professionals, and build up a potential client base
While these factors are often crucial to a new business’s success, there’s a flip side to getting angel investments that should also be considered. Let’s take a look.
- Demand For Equity: Even though the money put in by an angel investor is often instrumental in getting the company going, startup owners have to give them a substantial equity stake. This can go as high as 50% of the business
- ROI Expectations: While this is relatively rare, some angel investors might expect a really high return on their initial investment within five years. Such a situation puts a strain on the business and its employees
- Direct Involvement: While mentorship is usually welcome, many angel investors might exert more control over the business than the business owner would be comfortable with. A hands-on approach is not necessarily a bad thing, but if there’s a divergence in views as to how the business should be run, then it could cause conflict between the investor and the business owner
It’s important to keep all of these factors in mind while deciding if pitching to an angel investor is the best idea for one’s business. Often, it’s the only viable choice for startups looking to get off the ground. If, after adequate thought, angel investing feels like the right way to go, then it’s imperative for business owners to go into the pitch meeting with a watertight business plan and ensure that there’s complete transparency regarding the investor’s role and levels of involvement in the venture. Harappa’s Commercial Acumen pathway is specially designed to help high-performing leaders make astute and confident financial decisions in this regard. With the guidance of a stellar faculty and an array of frameworks like the Negotiation Pie and Scope-Quality-Time-Cost, learners are equipped with skills to overcome bias and negotiate wisely to drive win-win outcomes in business. The Commercial Acumen pathway opens the doors to an effortless achievement of goals!