Who is an angel investor?
Angel investor is the one who can provide funds for the start ups to the entrepreneurs. She invests in the business which, in her opinion, can fetch her substantial amount of profits. At the same time, start ups are also very risky.
If the start ups are risky then why do they invest?
We need to first understand who are the angel investors. Angel investors, commonly, are themselves entrepreneurs and the motive of investing is also to get the knowledge and exposure of the industry in which that start up would work apart from monetary purpose. They expect 20-30 times returns on their investments in a short period, say 5 years, i.e. the annual return of 300-400% annual return (without discounting the cash flows). They make an exit strategy through IPOs or any other source to limit their risk.
As someone who is going to be an entrepreneur, how is it beneficial to me?
For this we need to know the factors which contribute to the cost of the fund procurement.
- Initial Public Offering (IPO) is not so easy for a small business so that is out of question (cost of floating is also very high).
- Taking approval from banks involves hassles and interest burden. The business would not be so flexible. It would be mandatory to maintain Debt Service Coverage Ratio (DSCR) to pay interest to bank.
- Private placement carries no cost or very little cost. There is no compulsion of any kind.
- Amount that angel investors invest are generally much more than what a bank or any other source can offer.
How can I get funds for my start up?
First you need to know the major players in your industry. You need to contact them and explain your project. Generally, they can refer you to some angel investors. You can also find a list of investors in your region on angel.co. It would be better to find the “group” of angel investors as each angel investor invests less but procuring funds from a group is not that difficult as compared to a single angel investor.