An angel investor is a person who contributes funds to the start-up of a firm in exchange for convertible debt or equity ownership. Angel investors typically help start-ups when most investors are unwilling to fund them. A small but growing number of angel investors invest online through equity crowdfunding or form angel clubs or angel networks to pool resources and offer guidance to their portfolio firms. Angel investors are frequently retired business owners or executives who are interested in angel investing for reasons other than monetary gain. These include the desire to stay current with current events in a certain industry, coaching the next generation of entrepreneurs, and utilising their skills and networks on a part-time basis.
Angel investors are high-net-worth individuals who invest in small businesses in exchange for equity. Angel investors, unlike venture capitalists, do not use an investment fund; instead, they use their wealth. Compared to venture capitalists, angels may also be more patient with entrepreneurs and open to providing smaller dollar amounts for a longer period. But they do want to see an exit strategy at some point where they can pocket their profits, typically through a public offering or an acquisition. The more money an angel investor puts into your company, the higher the expectation of a higher return on investment (ROI). The expected return on investment varies depending on the angel and the investment opportunity. Angel investors frequently demand a 30 per cent return on their investment. As part of their exit strategy, angel investors will demand a return on their investment. This is when they sell their stock in the company to recoup their initial investment as well as any earnings.
Be aware that venture capitalists will seek a bigger return on investment. Because these businesses are contributing much more money, they will seek a higher profit margin. Even if a non-technical investor does not fully get the technology underlying a fantastic tech concept, they will have enough to say about the business strategy. Angel investors often demand a 5-10% equity part in early-stage investments, which might increase to 15% if the deal value exceeds Rs2-3 crore, depending on the magnitude of the fundraising. Angel investors are now exploring ways to invest in new tech start-ups that arent limited to equity financing. Convertible notes, which allow investors to lend loans to start-ups to convert them to equity in the future, are also becoming more popular. This permits angel and seed investors to avoid overvaluing start-ups in the early phases of their development until a later investment round.
Many firms are looking for bridge finance but dont want to dilute their stock because equity is costly. As a result, they prefer to raise debt through debentures and convertibles. Because angel investments often have a 6-7 year exit term, this allows investors to have more liquidity.