July 10, 2011
When an angel decides to hand over a large sum of money to invest in a new business, they are exhibiting risky behavior. Since most of these investments do not come with any form of dividends and many start-up businesses fail without making any real profit, it doesn’t seem like angel investing is a smart business to be in. So why do they do it?
One Success Covers all Failures
When an angel is given equity share in a company, one great success could easily make up for the failed businesses they invested in previously. They may invest in a couple businesses that fail but then suddenly the next investment makes it big time and the profit they enjoy is far more than what they invested to begin with, including those failed ventures.
Personal Trust, Professional Respect
Many angel investors decide to take on the risk because they believe in the individuals they are helping. This might be a wealthy business associate who knows what another associate has the potential of accomplishing, so they invest heavily. It might also be a family member who just wants to support someone they love who has a great idea.
A smart angel investor can size up the potential of a person just as they size up the potential of an idea. They can easily determine whether you are a good investment that they can trust.
Angel Skills & Experience
Oftentimes an angel will recognize that all a business needs to be successful is the skill set they possess themselves. They will then step in to invest financially while offering valuable knowledge and guidance to help the business succeed. They put in more than just their money in this case.
If this becomes the case with your business, don’t take the investor’s guidance and involvement as an insult. Acknowledge that they have just as much desire for your business to succeed as you do. They may just have fresh ideas and knowledge that will make you even more successful.
The Reward Justifies the Risk
When you take a corporate finance course you learn right away that a high investment must have a high reward. An angel investor certainly knows this, but many enjoy the thrill of high risk investing. The massive profit that could come if the business is successful is enough of a potential reward to lure them into the risky deal.
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