Do you wish to know what business angels mean? Find out what Business Angels are and where to find them. This type of private investor has a large number of advantages for small businesses and entrepreneurs who need a somewhat large amount to finance a project and who have difficulty accessing credit.
However, it is necessary to take into account the drawbacks of this financing formula and the basic advice to convince an investor.
When the amount necessary to finance our project is high and in a context in which credits and bank loans are not going through their best moment, one of the options that we can resort to is private investment through the figure of “Business Angels”. Throughout this article we will know:
- What are Business Angels?
- Characteristics of Business Angels
- Advantages of private investors
- Disadvantages of private investment
- Practical tips to get private investment
- How to find Business Angels and where to turn
What are Business Angels?
The anglicism “Business Angels”, “angelic investor” or “proximity investor” refers to private investors who normally provide capital to emerging businesses and startups in exchange for a shareholding.
The figure of the Business Angel has a personal, individual and private nuance that differentiates it from other financing models for start-ups, such as venture capital investments, in which the financing comes from third parties and the agreement, generally with more zeros, It is much more commercial in nature.
The support and participation of private investors in new businesses has evolved a lot in recent years, reaching a high degree of professionalization and organizing itself in investor networks.
Characteristics of Private Investors
The Business Angels are investment professionals with a great capacity for a financial contribution. However, this type of investor operates very closely with entrepreneurs, which is why they are also called “proximity investors”.
In this way, the Business Angels are situated in an intermediate position between the “Family and Friends” (or family and friends investors) and Venture Capital.
Its main characteristics are:
- These are people with financial resources and knowledge of the business world.
- They invest their own resources in exchange for a share in the capital of the investee company.
- They tend to get involved by facilitating their contacts and management knowledge.
- They are increasingly organized in networks, which contributes to the professionalization of their work, increasing their capacity for action, and allowing them to distribute risks between different projects.
- Their individual contributions usually range between 50,000 and 200,000 Euros. In order to finance a project of, for example, 400,000 euros, you will need the participation of several of them.
- They look for projects that enable exponential profit growth and are led by compelling entrepreneurs.
- They value the projects based on the business plan and various interviews with the entrepreneur.
- Their vocation for permanence is temporary: they want to sell their participation in a period of 5 to 7 years and thus be able to more than recover the money invested.
Advantages of Private Investment
- Business Angels are usually professionals with extensive experience in the field of business, they have a special “business acumen” and, normally, they can transfer a good part of that experience to any project.
- They are quite receptive to investing in the initial phase of a project (seed capital or start-up capital), although they will generally want to see a prototype beforehand to verify that the business is already working.
- Although its permanence vocation is temporary, it is usually greater than in other types of financing.
- It is a type of financing with hardly any costs, since it is not necessary to pay interest as in credit formulas.
- They invest their own capital in the project and, although they are not normally involved in the day-to-day management of the project, they do provide the entrepreneur with new contacts and business opportunities.
- Their investment decisions are not only motivated by purely financial aspects, but they are also likely to be moved by personal satisfaction or geographical proximity.
Disadvantages of Business Angels
- Although Business Angels can provide necessary and interesting guides and guidelines for the development of the business, some can make demands on the control of the company that entrepreneurs may find excessive.
- Due to the high risk of the investment, they usually require a high return on investment and results in the medium term, which cannot always be guaranteed.
- Unlike venture capital firms, these types of private investors are sometimes more difficult to investigate and contact, since there is less transparency around their figures.
Practical tips to get private investment
As we have just commented, for Business Angels the investment usually has a fairly high risk, since the chosen projects are usually new businesses and are related to innovation and new technologies.
Thus, this type of private investor expects a high return on investment, so getting their support is not always easy. For this reason, we suggest a series of tips that will help you “flatten” the path:
- Before requesting the support of a Business Angel you should try to have all the information you can about him to assess if he is the type of investor you need.
- It is important that he is truly interested in your activity, that he provides you with the level of involvement that complements you and facilitates obtaining a reasonable agreement for both parties.
- Calculate what you will allocate each euro you ask for. For this, it is very important that you pamper the financial plan of your project in detail.
- Decide in advance what percentage you are willing to give up. To do this, you must calculate the money you need and the estimated value of your company. Remember that everything is negotiable and that you can include different incentives in the agreement.
- Be realistic when selling your idea. You may have a very good project, but you will need a solid business plan, a successful market study and perspectives adapted to the reality of the market.
- Surround yourself with a good team and involve them in carrying out the project. Involve your team and your investor will see that you are a company truly committed to the project.
- Design an exit plan for the investor. Having a plan so that your Business Angel can leave the project at a certain time can be an added guarantee for him.
- Get at least one client. We cannot present ourselves to a Business Angel if we have not convinced at least one person or company that our product/service is really worthwhile and that they are therefore willing to pay for it.
How to find private investors and where to turn
Despite the fact that it is still an incipient figure in most countries, Business Angels have experienced an increase both in number and in their professionalization in recent years. In addition, and despite the difficulty of finding detailed information about some of them, the Internet has contributed to the development of angel investor networks.