When the term was coined, angel investors were wealthy individuals who made extremely early investments in enterprises. Over time, these investors have become not simply high-net-worth individuals, but also those with a strong investment philosophy and a passion for the startup industry. Here are some often asked questions about angel investors.
What types of businesses are angels most likely to invest in?
Angel investors are more willing to fund start-up enterprises that have a significant competitive edge, such as proprietary technology or well-protected intellectual property, as well as businesses in a big new primary market, are led by a successful and experienced management team, and where the business is properly valued. If the angels have a bad opinion of the business owner and management team, they are likely to pass up a lucrative opportunity.
How much do angel investors usually put in?
Angel investors often own a small percentage of the company—between 5 and 25 percent. They are unable to exercise formal control as a result. They seek contractual control as a result through board participation, restrictive and affirmative covenants on operational issues like pay and capital investments, structural issues like sales of assets and purchases of other businesses, and equity issues like participation in future financing rounds. They will also consider anti-dilution clauses and other such safeguards.
Which exit plans do angel investors favor?
Aside from return on investment, IPOs are the glitziest exit method, but purchase agreements are more orderly and give the investor better access to cash. Most angel investors leave when the business is bought out. Usually, they aim for a 5x to 10x return on investment over a five-year period. However, a sizable portion of angel investments end up being losses, which is to be expected.
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