Angel investor definition

An angel investor is an individual with sufficient funds to finance start-ups in return for part ownership of the business.


What is an angel investor?

An angel investor is a wealthy individual who provides financing for worthwhile projects and start-ups. They are often looking for opportunities to earn higher returns through riskier investments. Angel investors are also known as seed investors, private investors, and business angels.

Angel investors provide capital during the early stages of the business or give funds needed for further growth. In turn, they receive part ownership of the company. Angel investors can be found among friends and relatives of the founder, or they could be other wealthy individuals who believe in the long-term potential of the business.

Angel investor advantages

If the company’s value increases over time, the equity of angel investors will appreciate. Therefore, before funding a specific start-up, an angel investor usually considers the experience of the founders, the feasibility of the business proposal in the long-run, revenue expectations and the exit costs.

Angel investors are not looking for a quick return; they believe in the future outlook of the business and its sustainability. They expect to earn profits after a couple of years when the business operations expand and the company value grows. 

Start-ups search for angel investors because it is a better financing option compared to a bank loan or other debt instrument. If the business fails, the founder is not obliged to return the money, which is not the case with a bank loan. 

Angel investors are people with certain expertise, reputation, network of contacts, or former business owners themselves. They use their knowledge and networks to help the business get off the ground. Also, with angel investors start-ups can receive their funding faster, since the investing decision relies on the investor him or herself. There is no need for complex documentation and procedures, as would be the case with a bank loan.

Are there any disadvantages?

Receiving money from angel investors comes with certain drawbacks. First, the founders give up a portion of their ownership. This means that they don't have full control over the company. This can also be costly because investors take a stake in the business, which could be worth a lot in the future. 

Another disadvantage is that the search for an angel investor can be a time-consuming process. Moreover, although investors believe in the long-term potential, they could become focused on returning their investment faster, through the swift growth of the business. Consequently, they could put pressure on the founder to grow the business more quickly than the founder would have done if left to their own devices.

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