An investment opportunities will always come knocking at your door in various forms, but angel funding in particular usually come in from high net-worth individuals who, after diligent analysis on your path certainly may want to invest on it. Equity investment, whether they are common or preferred shares or convertible debt appeal to angel to invest in so as to take the huge advantage of it.
The mode of angel operation is either as an individuals or in-groups with many operating model, like some with collective due diligence, where each member vote to participate with their capital, which a majority vote is ultimately required to be a group deal in the passive3 such that after investment they wait patiently to invest their returns. On who want to be available and direct governance of their investment through forming part of the board seat to achieve that.
The angels as a matter of fact, expects a five to ten times the normal return on their investment, although, sound high, but for the fact that these early-stage company investments are highly risky, their expectations are not seen to be too bogus and un-realistic, coupled with the fact that it may not be successful, some ownership dilution in subsequent financing rounds are involve, more reasons angel funding is more expensive than bank loan financing, although, if you want to get assistance for a start-up, angel will always be there for you.
Why chose Angel Funding
Well, irrespective of the expensiveness, some people, especially those who are looking for funds to start-up a new business, angel funding is the next door to knock for help after what you realized from friends and family cannot carry the weight of the kind of business you want to embark on. This kin of investment is usually made from the investor’s personal funds, which ranges from $25,000 to $1 million maximum. Although, when grouped with other angel investors, an upper investment amount is about $2 million, at the time frame of three to five years with an expected return of five to ten times the original investment which translate to mean that angel funding is very significant, even as a smaller investments with more modest goals, but less time to a success outcome-profit. You might want to build up an accomplishment over time if your funding needs are in the $500,000 to $5 million area, because, such amount is considered a difficult range, and so it left for you to chose from the option of a smaller initial investment from an angel, so that can undertake subsequent financing rounds a higher valuations, placing it side by side with what the Center for Venture Research says that angels invested $22.5 billion in more than 66,000 U.S. companies, while VCs invested $28.4 billion in about 3,750 U.S. business, more over, that would not enhance the VCs investment at different rates and amount, but they also would have different incentives and goals, such that an entrepreneur may concede it in his or her self, and not mention to an angel that he or she is in deep discussion with a VC at any point in time. The reality of the matter is it is a turn off to the angel funder, while a simple thinking person may assume that it will add to the legitimacy of opportunity at one’s disposal.
The pre-revenue, and other early-stage companies, funding from bank may not be available for you, and if at all, an option of $300,000 may be an upper limit if you insist on bank funding. More reason for the expensiveness is the fact that angel funding is on active angel groups, where their membership often consists of experienced individuals that can also provide necessary guidance and mentoring services to their portfolio companies for better performance.
The selling of a portion of ownership in your company is the being in the custody of equity financing where the ownership could be in the form of common equity preferred equity, or a convertible security, through the mechanism of the investor receives an ownership stake, while the company gets the cash in return. Once again, remember that with these, the angel investor automatically becomes a part owner of your company in the agreed proportion to the funds provided in the partnership and the company.
Take this simple illustration: Mr Saliu Emmanuel, an entrepreneur with a skill training center was very pleased to secure $5 million in investment from a group of selected world renowned Labeled Fashion homes and dress makers. As a of the level of funding, the investor group received two board seats. Throughout the first three years of operation, the entrepreneur/CEO typically received an up to two telephone calls a day from these board members, and worrying about operational details or a competitor views item that might affect the business. Now you can see that the excess attention to investors was taking valuable time away from marketing and the other important functions that could hold the business stagnant as a result of lack vibrant focus on marketing on one hand, and other management details that needed urgent attention at the time of phone calls on the other hand.
The above illustration clearly explains how up and doing the investor could be with regards to running the business is considered an extra commitment that could take valuable time if proper care is not taken. The angels are usually your partner and in most cases are not passive about the confession. When situation demands, they can sit on your board of directors and will involve in several key decision that affects the company. Both of you are at risk, as there are no guarantee to being reward for their investment, so to say. And if they do get rewarded, the investor (angels) get their rewards in two way. The first is to give by periodic dividends, through very rare, because in a new company, all funds realized were used (plough back) to help grow the business for more profit. The second is by selling their shares out rightly to some one else in a subsequent financing round which present the consideration of most angel equity investors as an exit strategies in, lets say, about four to five years maximum.