Tuesday, August 9, 2016
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With all the press that angel investors are getting these days, many would be business owners and entrepreneurs probably think that finding an angel investor is the answer to all of their prayers, and the end of their search for funding.
While that may be true for a small number of entrepreneurs, the reality is that many entrepreneurs who receive angel funding still have to face traditional financiers and venture capitalists at some stage. In this article, we look at what angel investors do, and why you might still have to search for funding again in the future.
What Do Angel Investors Do?
There are many different types of angel investor out there, and while some do offer full financing for the companies they back, the majority offer what is known as seed capital to start ups.
Seed capital is usually a small amount of capital, which gives an entrepreneur the funding they need to start their business, and get it off the ground. It’s often enough to get your business from an idea to the start of profitability, but in many cases, once you reach profitability, and you want to expand, you will need to seek additional capital.
That additional capital is often referred to as growth capital, or first round funding in the world of venture capital. It builds on the start you’ve made with angel funding, and it’s often as necessary as the capital you need to start your business.
What’s the Point?
If you’re shocked to find that you might still need to look for traditional or other funding later on, and you thought that angel funding was going to solve all your problems, you’re probably wondering what the point is. Why bother to find angel funding if you’re only going to have to find more funding later on.
Well, the simple fact is that angel investors are often much more likely to finance new, untested businesses. They may also have a much higher risk appetite than traditional financiers, and they’re probably more willing to invest in your idea than anyone else is.
Angel investment is often the stepping stone you need to take your business from idea to working concept, and once you’ve proven that it’s a solid idea, and that it can make a profit (and you have the results to back up your claims), you and your business will be much more attractive to traditional financiers!
What to Expect?
When you work with an angel investor who is offering you seed capital, there are a few things you need to bear in mind.
First, you need to realise that often, angel investors provide small amounts of funding. Since angel investors are often private individuals, and often someone you know, you probably can’t expect huge amounts of cash! Some of the biggest companies out there got their start thanks to angel investors, but they only received a few hundred dollars in some cases!
Angel investors will usually also want to be involved in some way. Most will expect regular updates on your progress, and some will want a more hands on role, but nearly all angel investors will expect an equity stake in your company.
The goal with angel finance for start-ups is to give you just enough cash to turn your business idea into a profitable reality. Once you’ve done that, and have been running your company for a while, you will probably need to approach a financier with your business plan, and proof of your results. At that point, you might pay your angel investor back for their investment (plus interest or any other fees they may charge you) or they may decide to retain their stake in your business.
However your angel investment deal is structured, however, and whatever you need to do later on in terms of funding, it’s important to remember that angel investment probably won’t be the last time you seek funding, so think of it as a stepping-stone, rather than a finite solution!
This post was written by: Franklin Manuel
Franklin Manuel is a professional blogger, web designer and front end web developer. Follow him on Twitter