Companies need capital to operate and carry out their business. For established companies, raising finance is not an issue. Usually, these companies have sufficient funds and reserves to continue their business. For startups, the same does not apply. These companies need capital to take off. However, most traditional investors do not trust these companies with their money.
Startups usually have limited options when it comes to raising capital. Even when they have investors, they can only get little funds. However, there are other investors that can provide these companies with sufficient funds to carry out their business. One of these investors includes angel investors.
What is an Angel Investor?
Angel investors are affluent individuals that provide capital to startups or small companies. Usually, these investors provide more finance than normal investors. In exchange for their investment, they receive part ownership of the company. However, owning the company's shares isn't the primary goal for angels. Instead, these investors invest in startups that have the potential to provide them with high returns in the future.
Angel investors can be significantly crucial for startups. At the stage these companies are at, most investors do not provide them with finance. However, angel investors do not have the same objectives as those investors. In contrast, angel investors have long-term goals in mind. For that reason, they provide startups with finance for a longer time.
Usually, angel investors include wealthy investors that are affluent enough to invest in startups. These investors carry out their due diligence before choosing a startup in which they can put capital. Most startups also compete to gain their attention. Therefore, acquiring funds through these investors may be challenging. The finance that angel investors provide may vary. However, it is sufficient enough to get most startups going.
How do Angel Investors work?
Angel investors may include full- or part-time investors. Usually, these individuals identify companies that have significant potential. Based on their assessment, they select a company and invest their funds in it. In exchange, they get an ownership stake in the company. In some cases, they may also receive debt instruments. Based on their position, angel investors can also play a role in a company's management or provide advice on critical matters.
Angel investors are not temporary or short-term investors. These investors may provide finance to companies for up to seven years or even more. During this period, they remain the owner of the company to which they provide finance. If the company has progressed during this time, the value of the investment angel investors provided can grow substantially. After this period, angel investors sell their investments or go public with the company to reap the rewards.
What is the difference between Angel Investors and Venture Capitalists?
People often confuse angel investors with venture capitalists. While both of them have similar characteristics, they are also different. Both of these include investors that provide companies with capital in exchange for ownership. However, angel investors are usually private investors that invest their own money in a startup. Venture capitalists are professional investors and put other people's money into startups.
Similarly, angel investors usually provide fewer funds compared to venture capitalists. However, they are also more lenient and patient with startups. Angel investors are also less intrusive when it comes to the company's management. They usually take a passive approach when it comes to involvement in the company's operations. Venture capitalists, however, are more hands-on.
Conclusion
Angel investors are investors who provide startups with capital. Usually, they are wealthy individuals that seek investments in high-potential startups. In exchange for their finance, they receive ownership of the company. After a long time, usually between five to seven years, angel investors sell their ownership to get the rewards for their investment.
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