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Management,  Start-Ups

What are Business Angels?

“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”

By Steve Jobs.

An Business Angel also called investor sponsor or proximity investor is a prosperous individual who provides capital to a start-up or emerging company, usually in exchange for a shareholding. In addition to financial capital, they contribute their business or professional knowledge appropriate for the development of the society in which they invest.

Business Angels typically invest their own funds, not like private equity firms, who professionally manage third-party money. An increasing number of angel investors are organizing themselves in networks, groups or clubs of angels to share efforts and unite their investment capitals.

The angel capital covers the space, in the financing of a nascent business, between the three F (family, friends, and fools) of seed capital and venture capital entities. While it is difficult to get capital from family and friends, most venture capital entities do not consider investments less than 1 M€. Therefore, angel investments are normally the second round of financing for start-ups with high growth potential. It usually represents more money invested annually than all the venture capital entities added.

Angel investors select their investment projects by valuing the business plan presented by the entrepreneurs according to their personal investment criteria. Angel investments face an extremely high risk and therefore require a very high ROI, Return On Investment.

Investment profile

These types of investments are very high risk and are usually subject to the dilution of investment rounds in the future. As such, they require a high return on investment. Because a large percentage of investments is completely lost when early-stage companies are not successful, angel investors seek investments with the potential to multiply their original investment by 10 or more over a period of five years through a defined exit strategy such as a public offering or an acquisition.

Current industry best practices suggest that angels can look higher at companies that have the potential to provide them 20 times the investment over a period of five years.

After taking into account the need to cover failed investments and retained capital for several years in which they are successful, the current internal rate of return on investment stands at 20 to 30%. Although angels need a high rate of return on investment and this makes it an expensive source of funding, other ways such as asking for money from a bank are not usually available in the early stages of a commercial venture.

It is often said that the money provided by the Business Angels is smart money, as this type of investor often offers financing to support entrepreneurs by sharing their contacts, experience and knowledge with them.

Angel Investors when investing in companies in the early stages of development (seeds and start-ups) contribute to fill the financing gap that currently exists in a space once occupied by venture capital entities, today more interested in projects in more advanced stages of development.

The Angel Investors impulse the entrepreneurial activity, of impulse to the Innovation and of generation of Employment.

 

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