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Finding the right angel investor for your business

Angels can help your business grow.
By Entrepreneur Staff |

Even without capital, your business can take off with the help of investors who love what you are doing.

More than spiritual guardians, angels in the business world can be the blessing you’re looking for to jumpstart your business.

Referred to as angel investors, these wealthy individuals were first known to have funded many Broadway productions of the early 20th century. At present, angel investors mainly comprise experienced or retired businessmen who help fund an entrepreneur’s concept in its early stages.

For Ron Thompson, CEO of a Canada-based software company and a serial angel investor, the goals of an angel should be “to support entrepreneurship, help people become sophisticated in business and make money.”

But what’s in it for angel investors? It’s all about interest—both in the literal and economic sense. Just like the angels who funded Broadway plays because they loved theater, angel investors typically look for businesses that appeal to them personally.

This gives them the chance to invest not only money but also their experience and expertise, often actively participating in the startup company, which could be too young to qualify for bank loans and other forms of financing.

Investor-mentor
Compatibility between the entrepreneur and the angel investor in terms of vision for the company is vital as they develop a mentor-protégé relationship over time. The investor often takes a formal seat in the company’s board but consultations can be done as often as the investor permits.

“Most [business] founders believe all they need is money and everything will work out. The reality is that money represents about 50 percent of the value an early stage investor should bring to the business. Mentoring, knowledge transfer, and benefiting from the experiences of others are extremely important in building expertise, the team, and realizing the potential of the business,” explains Thompson.

Of course, potential returns on the part of the investor play a huge part on landing an angel for your business. Because angel investments are prone to dilution (the reduction of stock price or ownership percentage as a result of adding more stocks), angel investors usually need high rates of return after five- to 10-year periods.

Even that is only the ideal scenario: “This thought triggers lots of soul-searching with early stage investors mainly because a very high percentage of angels have a negative return on their investment portfolio. While I have had several exits with a positive return, most people have not,” says Thompson. “Regardless, we are constantly exploring and thinking of better ways to realize the high returns needed to justify the high risks in early stage-investing.”

Venture capital
While angels help during the early stage of a business, there’s a different kind of investor who enters the scenario when an entrepreneur’s product or service has already gained traction in a growing market: the venture capitalist. VCs are likely sought when “the company looks to raise a more significant amount of capital ideally at a higher valuation than the ‘angel’ round,” says Martin Lichauco, managing partner at Global Gateway Venture Capital.

VCs typically establish a funding company and raise money from external sources such as pension funds, fund of funds (FoFs) and family offices (private companies that manage investments of a single wealthy family). These sources, coupled with their investment strategies, entitle them to expect high returns from funding companies.

As such, VCs are able to take more risks in businesses with a unique advantage that cannot be easily copied by others. “VCs go out and identify game-changing and disruptive technologies that stand a good chance of emerging as next-generation industry leaders,” states Lichauco. Most VCs also look for investments with at least 25 percent rate of return.  

Another factor that differentiates VCs from angel investors is that the former do not involve themselves in day-to-day decisions of the supported company. For Lichauco, this isn’t necessarily a disadvantage: “If the angel has extensive operational experience, it may not be applicable to a company belonging to a different industry. Because VCs fully focus their efforts on taking each portfolio company of their fund to the next level, as part of their fiduciary responsibility to their investors, VCs cannot afford to oversee the day-to-day affairs of each company. However, we will always require board representation in the investments we make.”

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