How do angel investors get paid back?

One of the most challenging things for entrepreneurs is securing funding for their businesses. Angel investors could be the solution to your funding problem. An angel investor provides financial assistant to enterprises during their startup and beyond for a certain period.

Angel investors are typically successful and affluent individuals with vast experience in specific individual fields. You can also refer to them as seed investors, private investors, business angels, and angel funders.

Besides offering you money, which is an essential factor in ensuring your concept takes off, other trade-offs happen. The angel funder funds the business in exchange for equity in ownership.

What motivates angel investors to invest?

The top motivation for business angels to invest in your business is profits. An angel investor will put their money in a small company expecting that it grows and generates good returns.

After the number of years, they funded the business; it could be from 5-8, they wish to sell their shares at a profit during their exit.

Investing in a startup comes with a high-risk level as the business may stall or fail. Angels, however, take this risk in the expectation that it will give them better returns than investing in other areas like stocks would have.

how do angel investors get paid back
angel investors

What does an angel investor bring to your business?

Many benefits come from having an angel investor on board in your business. Their funding is through equity finance, meaning they can intervene at any point to save your business from debt.

Decision-making with an angel investor is quick and easy, unlike the decision-making process, for example, at a venture capital trust. No security is needed to secure funding from angels, and you have no pressure to repay the funds with interest or installments.

Business angels will also bring:

  • Insight for proper strategic planning from their knowledge in different sectors
  • Contacts of suppliers and networks to help grow the business
  • Advising on how to run the business operation, from their experience in the same.

Factors that influence an Angel to Invest in An Opportunity

1. The Size of opportunity

When an angel is looking to invest in a business opportunity, they analyze the problem you offer a solution to and how big the potential market is. They want to see if repeat purchases are likely and if the market is expected to get bigger.

They also consider the competitor products and the uniqueness of your product from theirs. For business startups, the main concern is whether their business model is scalable and how appealing it is to the market.

2. Leadership team

A comprehensive business plan and strategy are not all it takes for a successful business; it requires good leadership to execute. Before investing in a company, Angels will consider the team’s ability to seize the opportunity by developing and implementing procedures.

They analyze your skills, experience, and team cohesion to establish whether the team has the zeal and resilience to succeed.

3. Evidence of business growth

The best way to get angel investors on board is by providing evidence of your business growth. What progress has the business made so far, and is your product gaining traction. It would be best to prove that your business has been expanding; hence prospects of it growing even more with their help.

It is preferable and super convincing for new, untested opportunities when you present data evidence that things are happening.

5. Tax benefits

There are tax benefits advantageous to business angels; hence you want to ensure your fundraising structure qualifies for the tax reliefs.

The Enterprise Investment Scheme and the Seed Enterprise Investment Scheme(SEIS) help investors manage the risk of funding startup businesses making it tax-advantageous to invest.

Where can you get an Angel Investor?

Angel investor is a general name for investors who could be people you can find in different forms. You could get an angel investor in different ways;

how do angel investors get paid back
how do angel investors get paid back

Friends and Family

Friends and family are by far the most common funding option for startups. Mainly friends and family is the option for many looking to get startup cash for a business. This funding source can also be risky due to its impact on relationships in case the company fails.

Therefore, it is essential, to be honest upfront with the risks involved in the business for them to understand. You could also agree in writing with a lawyer present to help mitigate any issues that arise in the future.

Wealthy people

Wealthy people with a high net worth like lawyers, doctors, and other professionals are also a good source of angel investors. You could have a wealthy individual willing to invest a good amount of money in your business for ownership equity.

Word of mouth through business associates and associations like the chamber of commerce is where the referrals are done. Besides the money factor, most may not be of much value to the structure and running of your startup business.

Groups

It has become more common for angel investors to operate as a group, raising their potential investment level. They all contribute funds for investment and have a management team that chooses the investments.

Crowdfunding

Crowdfunding is an online funding option that allows large groups of people to invest in your business by contributing small amounts of money.

You may like to read, Types of Funding for Startups.

What are the returns for an angel investor?

An angel investor is looking for a solid return from the business they invest their money. Besides just getting their money back from a business they support, angel investors get a share of the company, such as 10%. After all, they are looking for a higher return in investment than other areas like stock markets can get.

The Angel’s main objective is usually to sell their business’s equity at a profit a few years down the line. If the company does not succeed, unlike with a loan, you don’t have to pay back the money the Angel invested.

However, if the business thrives, the Angel expects to get their money back within 5-7 years. The money Angel gets back is 20% to 40% annualized internal Rate of Return(IRR). The IRR on a business angel return on investment is on the lower end of what venture capital charges.

IRR considers the passage of time. The Angel compares the return the money would have brought in the five years was it invested elsewhere.

Angel also judges the success of their investment based on exit multiple. Exit multiple is the total amount of money the investor takes out of the business after the five years divided by the original amount invested.

Say an angel invests $50,000 and takes out $200,000 five years later. The exit multiple here would be 400%.

Types of angels

There are several types of angels your likely to come across;

  • The super Angel

The super angel kind of investor has several different organizations in their portfolio. Having this kind of angel investor is excellent as it would lead to networking and getting contacts of other potential investors and even venture capitalists.

However, due to their many enterprises, this type of angel investor tends to be quite busy to dedicate reasonable time to your startup building.

  • A founder angel

A founder angel is a fellow startup founder who has succeeded in their enterprise and is helping fellow new entrepreneurs while making money.

Having run a successful enterprise, they are an asset in your business. They have helpful knowledge to share with you from their own experience. Founder angels eventually have enough investments to make them super angels.

  • Specialty angel

Specialty angels are those with a history working in a specific industry. These angels invest in opportunities they see within that particular industry of expertise. With their vast knowledge and connections in the field, specialty angels are of significant advantage to the startups.

However, they could be used to a structured way of doing things that may contradict the diverse mindset of many startups.

  • Wealthy and bored Angel

The rich and bored angels are those in professional kinds of jobs like doctors and scientists. They may decide to get some excitement in their career by investing in startup businesses.

Despite being wealthy in injecting huge funds, they may struggle with adding operational and strategic value to the business.

You may like to read, What should startup know before seeking funding?

Advantages of angel investors

Having angel investors to fund your business has its advantages as compared to other funding sources like banks. Angel investors take a long-term view of an opportunity when investing and understand that they might fail to return.

Research has proven that businesses with angel investors are likely to grow substantially and remain in business longer.

  • You do not have to pay back the funds to the Angel as they receive equity of your business, unlike with loans where finances are paid with interest with the risk of losing assets listed as collateral.
  • Due to their rich experience in business, angel investors can offer insight, guidance, and mentorship for the company to grow.
  • Business angels are also beneficial with contacts of potential suppliers and other industry players.
  • They have a great marketplace and strategy knowledge from other similar companies, which is vital in scaling the business.
  • Having an investor in your business has some credibility attached to it.
  • Business angels may make investment decisions faster than, for example, venture capital trusts.
  • You do not have to worry about collateral when getting an angel to finance your business.
  • There are no interest charges when repaying an angel’s investment money.
how do angel investors get paid
how do angel investors get paid

Disadvantages of angel investors

While business angels are a great way to make it possible for a startup to run, there are some disadvantages to this kind of funding.

  • The first disadvantage of obtaining funds from business angels is the loss of ownership equity. Between 10-50% equity is offered to the Angel in exchange for funds.
  • The high expectations on return, up to 10time the original investment within the first 5-7 years, can cause unnecessary pressure on the employees and business owner.
  • The business owner is likely to lose control of decision-making in the business as many angel investors may take a hands-on approach.
  • Business angels always have an exit strategy in place and may convince you to let go of the business, for example, by selling it to big corporations in the view of making more profits.
  • It may take longer for a business startup to get an angel investor
  • The business angel funding model may not be suitable for small businesses that require small amounts like less than $5000. It may also be difficult finding an angel to invest in for a company that needs enormous sums.
  • For group angel investors, it may be challenging to access structural and mentorship support.

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Conclusion

Before bringing an angel investor on board, a business owner must focus on what else they will get from the Angel besides funding. Receiving mentorship, guidance, and business expertise is just as important as money.

It is also advisable to clearly understand the structure with the Angel investor to ensure you are on the same page about the business and its operation. Having conflicting ideas on how to operate the company could be detrimental to its growth.

Before accepting funding from an angel, it is essential to evaluate whether your business can grow at the rate the investor expects to avoid conflict. Consider having an open discussion on the expectation of growth.

The percentage of equity you give up for funding is also something to ponder. Giving away too much equity for funding could put you in a tricky ownership position. A more experienced executive with higher ownership equity could replace you, possibly kicking you out of a business you created.

Every move you make as an entrepreneur, even with funding, needs to be an intelligent, well-thought decision. Take your time to establish whether the funding option you choose is the best for your business.