You can have the best idea in the world to create a startup, but without the funds to back it up you may feel like you are at a stalemate. It takes cold, hard cash (or plastic or checks or even PayPal) for an entrepreneur to make the dream a reality to pay the rent, payroll, office supply company, and electric bill. Bank loans are the typical option to consider, but angel investors are becoming more prominent (especially with tech startups).
Angel investors tend to be wealthy business people and many times are successful entrepreneurs themselves. Overall, they need to meet the Security Exchange Commission’s (SEC) definition of an accredited investor by:
- having a net worth of over $1 million, or
- bring in an income that exceeds $200,000 per year (for individuals), or
- they need to represent a nonprofit, corporation or partnership with assets exceeding $5 million.
If your potential investor is an institution, it must be registered as a bank, insurance company, investment company, business development company, or small business investment company. Angel investors of the past were people you knew personally, but in recent history this role has been taken up by angel groups or networks that specialize in a specific field.
While you may think you have the greatest product or service that sells itself, it’s not as easy as it sounds to have one of these investors write a check with multiple zeros on it. Many are looking for companies that have hit their stride just beyond the startup phase. They are looking for the business to be solid while just beginning chapter two which needs funding to launch a specific product or marketing strategy. They’ll want the numbers of the revenue that you are earning and the costs of each aspect of your business.
Moreover, many investors want to see your business succeed since they have a tangible stake in it now (anywhere between 10 to over 50 percent). They may provide mentorships and will become a major factor in the decision making process. This could certainly be a double-edged sword in that these investors obviously have the skills to earn great sums of money, but you could also be fired from your own business if they feel you are an obstacle to reaching that success (depending on the percentage of the company they own).
Obviously angel investors can be the greatest asset to your company as they bring funding, experience, and valuable advice to the table so that you can reach your company’s full potential. There is also the risk that they may purchase a large portion of your company in which you may be scrutinized for your opinions and be eliminated from your own dream. Partnering with the right investor and knowing exactly what you are getting into can make this a beneficial collaboration for all involved.
[Photo credit: Sonia Roy]