What is Angel Investing? | Gather

July 31, 2012 08:18 PM EDT

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There are many options for start-up companies in terms of private investing. There are a few companies such as Effi Enterprises which can help start-up companies or entrepreneurs find capital sources. Angel investing is just one type of private investing which can help provide much needed funds to companies which are just beginning. These types of investors are different from Venture Capital funds. Venture Capital funds can be into the billions of dollars and the investor does not take as much of a part in the organization and development of a company. Angel investors usually only put amounts somewhere between 25 and 50 thousand dollars into a small start-up company which is planning on expanding but simply lacks funds for doing so. The Angel investor will provide funding for a start-up company with the plans of yielding a large return on their investment later on down the road. In general, they will expect at return of at least 10 to 20 times their initial investment.

What is the goal of Angel Investing?

Most of the time, an angel investor will focus on local companies so that they can provide more hands-on interaction and participation with the company. This type of investor will become involved with the company and generally is offered a seat on the board in exchange for the investment. This can be beneficial in many ways. The investor is able to have some say-so in the company?s dealings which not only protects their investment but also helps provide the company with some solid advice based on real experience or expertise.

How can you obtain Angel Investments?

It can be a lengthy process for an investor who is choosing a company to invest their fund in. They want to offer it to a company that will indeed benefit, grow and be profitable. Many times they can toss out as much as 90 percent of applicants who simply do not meet their criteria. Of the other 10 percent they will narrow down the options to just one or two businesses to carefully consider. For the entrepreneur this means developing a very clear and precise business plan which includes reasonable goals for the company. Once a company is considered for these investment funds they will be analyzed from every possible perspective.

The Angel investor will contribute funds to a business that they feel they are going to get a large return from. The company receiving the funding will need to be able to explain in great detail how they will handle many different scenarios including things like liquidation preferences, board seating and anti-dilution clauses. Unless the investor feels like they can get a substantial return on their investment they are not willing to contribute. Not only will they provide funding but they will also be investing time into the business to ensure its growth and profitability. In the economic climate today, this can take much longer than during previous years. Angel investors are careful to refrain from investing in companies which are higher risk. This is one way angel investing is different from venture capital; they make their investment and then are very involved in the business from there on out. The Venture capitalist will not be as involved with the company.

How do the Investors Profit?

Angels who make an investment into a company will take a very active role in its success. This is not a loan or some other types of debt financing; the investor is taking ownership interest in the business. They will be looking for a company which displays the potential for huge growth and profits. This type of funding is going to be offered to entrepreneurs who have a business plan that includes expansion and proposals for growth. Usually, one they invest they will be involved in the company until it is either sold or goes public with their investments; at which time they will make their profits back on their initial investment.

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Source: http://sustainability.gather.com/viewArticle.action?articleId=281474981508543

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