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May 21, 2010

Why Angels Invest

Angel investors are individuals who put money into a new or growing company thus gaining an equity share in that company. If and when the company reaches certain revenue milestones or is sold, the angel receives a portion of the profits agreed to in advance. Their investments range from $5,000 to $500,000 and tend to occur at the pre-seed or seed stage of funding – that is, the earliest stages, when the company is just beginning.

As such, angel investors assume more risk than venture capitalists, who prefer to invest at later stages (Early, Later, and Mezzanine) after the company has already demonstrated its ability to grow towards profitability.

For investors, young companies are a greater risk than “proven” companies. Thus the term “angel”.

Angels invest for four basic reasons: personal relationship with the entrepreneur; belief in the cause; the thrill of the investment game; and last but not least, return on investment. Make no mistake: An angel investor is not a charity. However, angels do invest for reasons other than profit.

Personal Relationship with the Company or Entrepreneur

Angels often to know and like the entrepreneurs they invest in. The angel might be a friend, family member, colleague, mentor, or friend of a friend of the entrepreneur. That’s why it is imperative for entrepreneurs and businesspersons to establish and maintain relationships with all of their influential personal connections.

Belief in the Cause or Mission of the Company

Angels enjoy investing in companies they believe in. For example, if the CEO of Acme Widgets demonstrates to the angel that Acme’s widgets will improve lives or revolutionize the way widgets are distributed, the angel will be more likely to help out at an early phase of Acme’s development. Angels often like the idea that they have found something unique in which to participate.

(Not-so-) Cheap Thrills

The psychology of an angel can be likened to that of a stock trader crossed with Indiana Jones. They enjoy the thrill of discovering a young company, funding them, guiding them towards success, and cashing in when certain milestones are reached (revenue windfalls or the sale of the company.)

ROI

Just because they tend to have adventurous, idealistic, or altruistic spirits, angels would like to see a handsome profit from their endeavors. In fact, the earliest investors of a company usually the see the highest rates of return when that company hits it big.

When seeking angel capital and writing your business plan to present to investors, keep in mind the four points described above. Knowing the psychology and motives of an angel investor can mean the difference between a great idea that never comes to fruition, and a great company that flourishes.

Discover How to Raise Capital From Angel Investors

Dave Lavinsky from Growthink has created a step-by-step guide that shows you exactly how to find angel investors, set up meetings so you can pitch them, and then negotiate favorable investment terms.

Want to learn more?

Click here to raise capital from angel investors.

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