What is an Angel Investor? WOMENA Explains
Every year, hundreds of millions of people around the world begin their journey in entrepreneurship. Whether driven by need or desire, in hopes of creating a small family business or a large global enterprise, a necessary resource for any entrepreneur to begin is capital. Many entrepreneurs start their businesses on informal funding from themselves and what we in the business refer to as “FFF: friends, families and fools.” For some, this funding is enough. However, many, especially those with high-growth potential, will require multiple stages of funding in order to grow.
As entrepreneurship continues to flourish around the world, so too do the number of individuals who choose to become early stage investors in these startups. Referred to as an angel investor or a business angel, they are individuals who are independently wealthy and seek to invest their own money in startups. As early stage investors, angels typically invest during the seed stage, when a company has most likely built a prototype [link to commonly defined terms?], but has no real traction or growth. Because most of the business plan is still unproven at this point, the risk for investors is high but the entrepreneur’s need for capital is critical- a situation that has resulted in the investors being referred to as “angels.”
Because the risk for investors at this stage is so great, most angel investors will invest smaller amounts, between $10,000 and $50,000, in multiple companies. This approach allows an investor to diversify his or her portfolio, increasing chances that one of the startups will be very successful, referred to as a “homerun.” On average, most investments in a portfolio will fail, while only 1 in 10 investments in a portfolio is likely to return 10x the investment and 2-3 investments may return 2x the investment. To further mitigate the risks of early stage investing and increase the likelihood of funding a “homerun,” many investors join an angel group to invest alongside other angels.
Besides the risk, a major attribute of angel investors that sets them apart from other types of investors is that they usually offer their investments more than just capital. Angels provide valuable resources such as strategic or managerial advice and introductions to their personal networks to help the business grow. Oftentimes, an angel will sit on the board of advisors of the company in order to stay involved and offer assistance when needed. At such an early stage, access to such resources is an invaluable asset of angel investors and can help increase the likelihood that startups will survive and grow.
As an increasing number of individuals set out to disrupt various industries with their ideas, so too does the need for investors who are willing to take the risk of investing early and who can offer mentorship and guidance to their investments. If you think angel investing is for you, contact us or apply to be part of WOMENA.