Archive for the 'Fundraising' Category

Crowd Funding 101 – Everything A Startup Business Need To Know

Starting up a business requires capital. There are many sources from which any potential business owner can get this capital, these include crowd funding.

Crowd funding is a process where funds are collected by approaching various individuals or organizations for various purposes. Most charity campaigns are funded through crowd funding. Today, it is not only to get donations but also to fund various business activities and also educational campaigns. It is also a common way through which most travel writers fund their trips.

Crowd Funding Websites

Imagine a website where you can login and browse through a pool of courses and business ideas that lets you choose one that appeals to you best, giving a contribution towards that course. You can from time to time login in and make more contributions or check the impact of what your contribution has done. You become a member of a community that funds business ideas or charity causes.

The crowd funding websites offer the means for any individual to start up a business idea and for investors to invest without the hassle of a middle man.

The Pros and Cons of Crowd Funding

There are three main realities in crowd funding. These are;

  1. Entrepreneurs need to raise funds from their family, friends and angel investors
  2. More Investors get to partake in the financing of a business
  3. Many business ideas that would have been forgotten can finally be funded.

Each of these realities has its own high and low points

Pros of Crowd Funding

  1. Entrepreneur gets to spend their time in the running and planning of the business. Less time is spent in getting the required cash that keeps the business afloat.
  2. Makes it possible for entrepreneurs with humble beginnings to have their business ideas funded.
  3. Anybody can choose to invest in a business.  It is no longer the rich getting richer but the smart getting rich.
  4. Ideas that seem complex and difficult still get to be funded. There is no limit or boundaries to the business ideas that can be invested upon.

Cons of Crowd Funding

  1. The entrepreneur loses the opportunity of facing the prospective investor on a one-on-one basis.  He or she does not get to have a chance to convince the investors to believe in his ideas.
  2. Entrepreneurs have less feedback from the investors; hence they are unable to modify their business ideas and models to that which might attract more investors.
  3. The investors do not get to have a clear idea of the risks that are associated with the business. They are liable to making bad investments. All the necessary facts that will help the investor make a good decision or understand the concept of the business idea in details are not made available.
  4. Investors are susceptible to fraud.
  5. With all sort of ideas getting funding, both the possible and the impossible. There are more chances of investors being discouraged with the percentage of success on the low side.

The Mechanics of Crowd funding

There are four basic ways that Crowd funding works

1. Donation:  You get to donate any amount of your choice to a course you want to support, or a business idea that you fancy.

Pro: The donor feels good

Con:  The amount donated goes off without anything in return.  If the donation is to a profit company you still get to pay tax on the donated amount.

2. Pre-Sales: Here you get to pay $100 and get $100 worth of service goods in return.  These goods and service will be rendered at a later date.

Pro:  You get to support a business and still get some rewards in return.

Con:  You have to wait for months before gratification of the cash spent is realized.  There also is the risk that the service or goods might not be exactly as promised.

3. Loans:  Here you give a loan to an individual or for a cause or business. You get to be repaid when the agreed time for repayment arrives.

Pro:  There is little risk involved.  You get to invest into a local business and have a predictable interest on your money.  Better than having you cash in your bank account with no interest.

Con: Your funds is tied up without any guarantee of interest

4. Revenue Sharing: In this scenario, you invest a little amount and get equity shares or percentage of the profit made for the amount invested.

Pro: Has a potential of giving you more money than loan.

Con: The probability of success in the invested company is uncertain.

Conclusion

Crowd funding is one of the best ways that budding entrepreneurs can get the much needed funds to get the business off the ground. The investors all get a chance to contribute to a worth course that might change lives.

Crowd Funding For Startup Business-Low Risk Capital

The greatest challenge that faces every start up business is; getting enough capital to get started.  Other than the seed capital, you must also have enough resources to sustain the business.  Banks are usually the greatest source of startup capital for most business owners but this option requires collaterals, not to mention the tedious loan acquisition process. Most entrepreneurs don’t have the collaterals and the bank loan option is not appealing.

Alternatively, you may want to borrow funds from family or friends. However, this is not always advisable as the family or friend will want to exercise some control over the business. Furthermore, how much can you really collect from family and friends-unless they are all Bill Gates type?

These challenges have resulted in the popularity of crowd funding, which basically fits any type of viable business idea. This can easily be realized from various websites that mainly focus on bring together investors and potential entrepreneurs.

Crowd Funding Options For Startup Business

In crowd funding, the aim is to get donors who are interested in helping on to get started in a line of business of choice. The most amazing thing is that, only donors who are willing to help without any strings attached are encouraged to support. This means that they will neither be offered stock nor will the business owner promise them anything in return for their investment.  However, they can be offered instant rewards such as t-shirts, company mugs, and other gift items.

Basically, what the entrepreneur seeks is a network of individuals who are willing to pool in their resources in order to support an idea or effort what the entrepreneur has initiated.  Crowd funding is not limited to entrepreneurs but to other organization seeking funds for disaster relief, political campaigns, scientific research and software development.

Another option in crowd funding is to raise the initial capital needed by pre-selling the product with a discount.  The product will be delivered at a future date that can extend as far as a year.  If you have a product that you can convince the public to believe greatly in, they can pay for this product and await the delivery at a later date.  This option does not always work for all business owners; while some might get seventy percent of the funds needed, there are those that get nothing.

Difference Between Donor And Investors In Crowd Funding

There is a significant difference between the donors and investors in crowd funding.  The investor loans out his money with an intention of getting the money back and in most cases with an interest. The investor’s interest does not hinge on the success of the business.  Even if the business owner fails in his dream, he is expected to repay the investors every penny they invested into his business.  These investors are offered stock in the company and get to become stakeholders and have a say in the decisions that affect their investments.

The donors give freely and do not expect any reward for what the business owner promises them.  If the cause or business to which they have made a donation succeeds, they get a reward (usually what they have been promised). Should the business fail, the business owner does not have to pay back the funds donated to start up his business.

Platforms for Crowd funding

There are a couple of crowd funding platforms available on the internet for startups, a few are explained below;

1. Kick starter: This is an old platform that has amazing recorded success in crowd funding.  They can help to fund everything from innovative projects, art and designs to technology.  This platform has a success rate of 44% and has recorded over 70,000 projects launched on its website.

2. Indigogo: This is a large crowd funding website and among the oldest in crowd funding platforms. They have crowd funded over 30,000 projects that run across 194 countries.  The aim of Indigogo is to create a crowd funding solution that will empower all ideas and help them have funds donated easily.

3. Quirky: Quirky is a website that helps inventors to develop their product and inventions.  They help only investors to source for funds for their invention. The websites claim to have funded over 240 products. If your new business idea revolves around inventions, this is the best option for you.

An Alternative to Business Start-up Loans

There are risks involved in getting a loan to start up a business. Crowd funding should be considered first before a loan. If a loan works out, fine, but, should it fail, there is a lot of trouble.  One can find himself in insolvency, personal debt or facing bankruptcy. The risks involved in crowd funding are pretty low compared to a bank loan.

Funding a startup with friends and family

Even though many entrepreneurs rule out family and friends as crucial sources of seed capital, they are actually among the best. One of the main factors that discourage many startups from borrowing from family and friends is the fear to compromise relations, just in case things don’t work out. It is less complicated to source for capital from friends compared to other common sources like bank loans, angel investors or venture capitals. Just like any other source of capital, borrowing from friends and family also has its own pros and cons that must be well understood.

It can be tricky approaching family and friends with a business proposal about a venture you thinking of. The best way to go about this is to treat your family and friends like any other investors with some interest in the business.

There are individuals who will make it clear that they are not interested in your business, all they will require is a refund of the money loaned. In fact, this is even better as your independence will be retained; you can make key business decisions fast and focus on paying back the debts to your family and/or friends. One thing that you must bear in mind when borrowing is that, you have to strive to respect your end of the bargain or you may be forced to skip the next family reunion.

Preparation

If you are assuming that blood is thicker than water, and you can just borrow for money on during dinner or on a family reunion, you need to think twice. To be taken seriously, you must prepare yourself with a sensible business plan. Using the plan, convince the family to believe in your business idea; that is the only way you will get some checks written in your name. Work out a brief but concise executive summary about what you plan to do and how much you intend to raise to get going. You should specify the valuation, the investment amount each investor can contribute to own a specific percentage of the business and what you actually plan to do with the money; that is if you get their funding. This should be a simple procedure, but has to be handled with equal seriousness to be taken serious in the first place.

Be Specific

It doesn’t always pay to blindly thrust a proposal to individuals who cannot afford to raise the required capital. You must sort out your potential investors from individuals with sufficient income and capable of sparing some for your investment. No one will welcome the idea of investing in your business and having to survive on water and bread. Steer clear from family members who cannot afford; assuming your venture fails to pick up as expected (just being realistic) your investors must be able to live even without their projected income from your business. Accredited investors in your cycle are more favorable as the laws all over the world are somehow lenient on such individuals.

Be Honest and Realistic in your Valuation

It is always great to be optimistic when setting up a new business, dreaming about huge profits and rolling income. However, a good investor plunges into a market fully aware of the challenges that he or she is likely to encounter. Share with your family and friends not only the best-case scenario, but also the worst which can mean losing 100% of the investment. It is also possible that the investors may have to wait for up to five years to record any returns on investment. Telling lies can only cause trouble in future. It doesn’t matter how bad you need the capital, don’t raise their hopes high as they will be disappointed if they are eventually hit by the sad reality-they will point accusing fingers.

Diversify the Seed Capital Sources

Just because family or friend X is an accredited and successful investor and can invest in your business doesn’t mean that you mainly rely on him or her to raise the seed capital. It is better you diversify your borrowing from different family members and friends. One thing that you have to consider is that not everyone will be excited about your proposal. If one member lets you down, you will still be able to count on the support of another. If you encounter any individuals who are uncertain, with reservations, don’t attempt to squeeze the money from them. So long as you have laid your cards on the table, it is better if the chooses to support you in your venture.

The most important thing to consider when sourcing for funds from family and friends is to convince them to believe in your business idea. After scoring this milestone, raising the seed capital will be much easier. Actually, if your family and friends cannot believe in you, then it is unlikely that angels or other investors will.

Angel Investment Funding Vs. Venture Capital investment for Seed Capital

As opposed to the current assumption that money is scarce, there is actually more money out there in the hands of investors. Any serious entrepreneur shouldn’t have a problem accessing capital to set up a business. What is currently being experienced is nothing different from the depression in 1930s that mould more millionaires in a single era. The historical low interest rates and the volatile stock market have prompted many high net worth investors to shift their attention to diversifying their portfolios. Despite the glaring reality, many startups fail to pick up because of insufficient capital. That doesn’t mean there is none.

The availability of capital to establish any kind of business is determined by the nature of the business and the amount you are seeking. Venture capitalists, just like any other investors closely watch the performance of any business they float their money to. In this regard, they prefer to work with few serious startups with potential as opposed to many tiny ventures. Even if investing in a private equity (like yours) shows potential to grant them more value, they may choose not to for simple reasons as management and monitoring. There is always another option though; angel investors who can provide the necessary capital to get started.

Angel Investors Vs Venture Capitalists

Raising seed capital from venture capital firms is one of the best ways to raise capital for your business, but this comes with a few challenges like loss of equity in excess of 51%. Another mandatory right that they seek that may not be so attractive to the entrepreneur is the “right of sale.” Venture capitalists believe in getting their ROI as soon as possible and in most cases, may lack the patience to stand by a startup during its infancy, especially if it fails to pick up as earlier projected. In most cases, they will embrace any deal so long as they acquire their bonus for the skills invested plus their risks. They however have the money, a lot of it for that matter.

Startup entrepreneurs may find angel investors more appealing due to the diversity of this group of investors. Most angels take an equity stand and some amount of debt or both in place of their investment. To monitor their investment, they reserve a seat in your board of directors, which they also use to offer significant advice and mentorship. Some angels can even take up some active management roles of the establishment and propel it to success. It is very possible for a business to hire competent employees and grow to qualify for other sources of financing to help it grow. The entrepreneur will get access to a broad range of business networks expertise from the angel. Finally, the angel networking syndicating can help the business raise significant amount of capital with just a single angel financing deal.

All that Glitters

Venture capitalists may appear as the best source of finances for a startup. However, they may not suit a new entrepreneur trying to push the business to reasonable heights and success. They may however suit a business with an established market presence and assured returns on their investments. If you are considering an IPO or trade buy-out as exit strategies, then raising capital from venture capitalists may be the best solution in this aspect. The venture capitalists will help you properly structure your business for much bigger businesses, providing their broad and effective networks of personnel in preparation of the exit and hoping to cash in eventually.

On the other hand, entrepreneurs who want to build and stick to their businesses will find angel investors more useful. For the business to benefit both parties, the agreement should be well thought-out and reasonable. Venture capitalists normally craft agreements from their perspective, and in most cases, it is biased as their focus is to get their return on investment. On the contrary, angel investors are more flexible to work with because agreements and any deals are settled upon fairly and customized to benefit both parties.

Structured Investment from Venture Capitalists

Motivated by returns, venture capitalists bring on board structured investment, experience and managerial skills necessary to propel the business to success. This may be what many startups need, but what really matters for new entrepreneurs is the mentorship especially in the early stages of operation. When it comes to exit through a trade sale or IPO, their networks can be instrumental. The main challenge lie in their power over the business and interest to get their money back, a situation that may force the entrepreneur to go for alternatives that conflict with their ideals, dreams and beliefs.

Depending on the aspiration of the entrepreneur, angel investors may be the ideal solution since they retain the independence to run their business as they wish. You can turn to venture capitalists later after the business is stable enough and ready for expansion. It is recommended that you seek the best legal brains when dealing with venture capitalists as they have a way of drafting agreements based on their own preferences.

Five Main Factors to Consider to Successfully Apply for a Startup Bank Loan

It is not easy to raise sufficient capital for your startup business, especially through a bank loan. To obtain a bank loan, you have to undergo lengthy and cumbersome processes, which can even be frustrating. Furthermore, banks are usually skeptical about investing in new ideas since they are equally likely to fail, as they are to succeed. There are however some strategies that you can employ to boost the chances of the bank’s approval of your bank loan.

1. Write a Convincing and Realistic Business Plan

It all starts with the business plan. When drafting a business plan, it is the strength of your idea and on whether or not you can transform it into a profitable business as captured in the plan. It is about you, the company and the brains behind it. All these should be put together in a clear document that will appeal to the banks. Always remember that startup businesses are risky ventures, which is why commercial lenders like banks are hesitant to invest in them. However, if you are planning to start a small business, there is a better chance that your loan application will be approved. There are some banks that offer loans for small and medium enterprises. If your business plan is feasible, the likelihood of a loan is greater.

2. Research and Prepare Before Approaching Loans Officers

Before approaching any bank for a business loan, know and understand your specific requirements. Banks like specificity and require precise answers from you when it comes to money. One common question you should have the answer to, is the amount of money you will need. Vague answers are and indicator of a person who doesn’t know what he or she really want, and before you know it, your application will be dumped in the next thrush bin.. Do your cost analysis and make a spreadsheet for your startup costs by listing all the things you will need to start your business and list their respective costs. Another question banks ask is about the usage of the loan. There are three ways in which any entrepreneur can use the money; buying assets, paying off debt and paying for operating expenses. Before going to a bank, figure out what your target usage will be.

3. Compare Interest Rates

If you are thinking about applying for a startup loan, you should consider multiple options so that you do not rely only on a single source. When making your financials, keep in mind that the interest rates vary from one bank to another. This directly affects the interest expense in your income statement and the liabilities section of your balance sheet along with the financing in your cash flow statement. For a startup, it is a challenge to pay very high interest rate on a loan. Make an estimate of how much interest rate you can afford. Remember you will have to repay the loan and accepting a loan with high rates might make repayment a hurdle you cannot jump.

4. Security for the Loan

Considering that the loan is a risk for the bank, banks need to make sure that you can pay it back, and if you forfeit, well, you can as well forget about some asset you surrender as security. The most common medium of security that banks take are collaterals. As an entrepreneur, you not only have to convince the bank of the feasibility of your idea, but also the value of your collateral. To prove your idea’s worth, support it with figures, as investors gauge its worth through its potential sustainability. This is something reflected in the financial projections. Outline your marketing strategies in your business plan because they reflect your growth plans. If your business is a sole proprietorship, you will need to present your personal financial statements that list your liabilities and assets. You will also need to present a list of your credit cards and their balances along with any loans you may have outstanding. Your monthly net income, monthly mortgage and rent payments, balances of checking and saving accounts, value of a vehicle and its monthly payments and balance owed, total current value of your property, which includes real estate, bonds and stocks, are all part of the records you need to present to the bank in order for your loan application to be accepted. All these are aspects that provide insight to the bank about your financial stability.

5. Loan Repayment Schedule

Loan repayment is another important factor you need to take into account when applying for a loan. The repayment schedule is an aspect that will have a significant effect on your business’s financial statements. Depending on a bank’s policies, the repayment options vary. Before going to the bank, you should have an answer to the question about repayment, as this is another question banks often ask.

Conclusion

There are many financing options available for startups, but where you look for the money depends on the nature of your business idea and its requirements. With a good business idea, you can get a loan from your local bank. For entrepreneurs, the strict underwriting principles of banks can be challenging, but through a well-thought business plan and thorough homework, your loan application stands a high chance of being accepted. Have a strong grip on the specifics and make calculations to come up with estimates so that you can answer the bank’s questions. If one bank rejects your applications, don’t despair, move on to the next, you might just get lucky!

Five Things Entrepreneurs Must Know About Angel Investors

Finding an angel investor for a start-up business might be a good idea, but not always an easy one. Many entrepreneurs usually draft very convincing plans and proposals, book appointments with dozens of angel investors and make their presentations to numerous angels, hoping that at least one of them will be convinced enough to invest in the business. They later feel dejected when none accepts to fund the business. It is less productive to hit at a large number of angels from diverse geographical locations with generic pitches. A properly organized entrepreneur with a viable plan and the right investment ideas in a specific industry of interest may actually approach only a few interested investors and succeed in convincing them to invest in his or her business.

Most mistakes that budding entrepreneurs seeking angel capital commit are as a result of insufficient information about angel investors; their interest, amounts limits, returns on investments, duration, and nature of business or industry, among other crucial factors. Below are five tings that entrepreneurs must know about angel investors before approaching them to fund their startup businesses.

1. The Nature and Sector of Business Matters to Angel Investor

This is one of the most important things that any entrepreneur hoping to raise funds through angel investors must understand. Angels don’t just invest their money in any business as most of them have specific interests in certain sectors and industries. Although their inclination towards certain types of businesses is constantly changing, they still revolve around specific areas. One will argue that angel investors, just like any other investors are mainly interested and motivated by the return on their investment, irrespective of the sector. Well, as much as this is a possibility, the trend in recent years indicate that entrepreneurs from health and medical sectors, software engineering and development, biotechnology, Information technology and energy, stand a higher chance of appealing to an angel investor to fund their businesses. Forget about angel investments if you are into adult content and pornography, gambling, insurance and related fields.

2. Angel Investment is High Risk, Investors Expect Higher Returns on Investment

If you were to invest in an idea without any tangible proof, how would you guard yourself against potential losses? There is no investor who entertains losses as the main purpose of investing in any business is to realize some returns on your investment. Angel investment is a high risk venture especially for start-ups, whose failure would result in losses for the investor as well. To guard themselves from predictable losses, angel investors usually demand for a higher return on investment for a predetermined period of time, say five years. Sometimes, you will have to pay over ten times the initial investment for a period of up to ten years.

3. It is not always About the Idea, But the People Behind the Idea that Matter

The first indicator of a successful business deal lies in the introduction. Angel investors will not just dish out money to any business without clearly understanding the brain behind it and the people close to the entrepreneur. To boost your credibility, network with potential investors and entrepreneurs and build some serious business relationships some months before you start pitching for capital. Your connections, also known to the angel investors can then introduce you. Furthermore, you must prove that you are competent in a certain area, with a proven record of building and sustaining businesses.

4. Your Business Plan is Key

Angel investors are not members of your family or friends who will easily trust your verbal pitch and lent you money. You must come up with a real, viable, realistic and measurable plan with a clear outline of the problem you are seeking to solve or gap you hope to fill. Your business model must as well be perfectly spelt and also the exit strategy. They have to know how you intend to make money as well as pay them back.

5. Go Local

You might have an idea that will change the whole world into heaven. However, that doesn’t mean that any angel investor from any part of the world would be interested in investing in your business. You will be disappointed if you send out ten thousand mass emails to angel investors from around the globe. If you must, then take the idea to the locality in which your angel investor is and make it work. Angels prefer to deal directly with the entrepreneurs, find out their progress and if indeed their investment will pay off eventually. This would be different if the investor is located in another continent. The amount of seed capital you can get from angel investors is also limited due to the high risks involved.

Conclusion

It is not easy to find and convince an angel investor to float cash into your start-up. Most of them will kindly turn down your request, and even tell you why. Some will not burn any bridges by asking you to come back later, either after attracting a number or customers or attaining a set landmark. Never give up if one angel investor turns your proposal down, try someone else and who knows, you might just get the much needed angel capital.

How to Raise Seed Capital for Your Startup Business

Many startups suffer from one main common challenge; insufficient capital. It has never been easy to find finances for new businesses mainly because of the high risks involved. Well established companies today had to start from somewhere and very successful entrepreneurs today were at some point turned away by their target investors.

The most common and preferred source of income for a business is usually using up personal savings or borrowing from family and friends, but you cannot raise sufficient capital by only asking friends and family. It is therefore essential that you explore other available options like taking loans from banks, venture capital, approaching angel investors, among others.

Irrespective of the avenue you turn to in your effort to raise capital for your business, there are a number of factors that you must look if you are to succeed.

Use Other Entrepreneurs to Meet Angel Investors:

Connections and referrals are useful in all aspects of business transactions. You might not have a long list of angels to pitch your business idea to, but using your connections, you might just succeed in finding an angel investor interested in your line of business.

Do you know any entrepreneur who was funded by angels before? As much as angel groups rarely expose the names and contacts of their members, they share the list of investments they have funded on their websites. You can go through the list and find a business that resemble your own business idea and contact the entrepreneur for assistance and even connection to the specific angel who invested in their business.

Timing is Crucial:

There are times when you are likely to find it hard to identify and meet potential investors. Most of the high-net-worth investors usually retreat to vacation destinations especially all through summer, and the period between Thanksgiving and New Year. You might have a perfect pitch for a potential financier, but there are times when you risk failing to arouse their interest or receive delayed responses.

The same applies to other alternatives that you might want to use like banks and other financial institutions. The best time to raise funds for your business is during the first quarter of the year, (between January and March.)

Do not Pitch to Everybody:

It explicable that you need seed capital for your start up, everyone, including the investors and lenders understand this fact so well. However, that doesn’t mean that every investor and financial institution, and even individuals are interested in your business and are willing to invest in it.

You must analyze your business’s need and amount of capital you are seeking to raise before making up your mind on the type of investors or financial source to approach. This will reduce the pain of approaching uninterested parties.

If you choose venture capital, for example, narrow down the number to like five at a time, and then customize your business plan as per every investment group you choose. The same applies to when you are borrowing from the banks, approach each bank individually.

Find an Investor With Interest in Your Field:

It is believed that the best way to see the future is by looking at the past. This means that investors who have initially invested in a certain field are likely to be attracted to similar lines of business, especially if the previous ones succeeded. If you intend to invest in real estate, find an investor with interest in real estate. If you have to use financial institutions, find a lender with special focus in mortgages and real estate. This makes it easier for professionals in the field to review your business plan and gauge if it is practical or not.

Catchy Business Plan:

Investors have a preference of floating their money in an already established business with proven profitable record. The situation is far much difference when trying to find an investor for a start up business mainly because the only proof most startups have are the great ideas that can only appear practical on paper.

The risks involved are equally high and therefore, you must be convincing, realistic and measurable in your business plan to attract any investor to your startup business.

A professional proposal alone however doesn’t do the trick; you must be capable of standing by it, and defending it in the most convincing manner possible. If you cannot put your great business ideas on pen and paper, consider seeking professional assistance from professional writers.

Finally, Never Give Up!

There is no guarantee that the first investor you approach with your business plan will accept the proposal and finance your startup; don’t raise your hopes so high. If your request is rejected by one financier, move on to the next investor and try your luck.

Seek to understand why the previous investor rejected your proposal and try to correct the mistake in your next pitch. Banks are usually skeptical about financing startup businesses, and you must be ready to face rejection but don’t be discouraged.

Be passionate and enthusiastic about your business idea as you move from one financier to another, you will eventually get someone who will share your passion and enthusiasm and help you raise the seed capital for your new business venture.

PS: You may also like to read How to Find the Right Angel Investor for Your Business

All You Need to Know About Angel Investors and Your Startup

Many startups face financial hardship that is only solved by attracting investors who float the much needed financial resources to the business. Angel investors, also known as business angels, informal investors or just angels, are wealthy persons who fund start-ups in exchange for some ownership equity in the business or convertible debt. An increasing number of angel investors form small angel networks or groups to collectively share research and merge their investment resources.

An entrepreneur working with an angel investor acquires venture capital from the individual interested in start-up businesses that demonstrate high prospects of growing and succeeding in an industry of interest.

The main difference between angel investors and venture capitalists lies in the source of funds. Whereas venture capitalists manage other people’s mutual funds in a well organized and properly managed fund, angel investors use their own money. The angels can however get their funds from various sources that range from businesses, trusts, investment funds, limited liability, among others, but their investment judgment are solely their own.

Are Angel Investors Right for My Start-up Business?

It is usually thorny for startup entrepreneurs to make up their mind about their key sources of capital. Most of the options available have their own advantages and disadvantages and it is the responsibility of the individual to weigh the available options and make the right verdict. Researchers have delved into the success and effectiveness of angel-funded start-ups and come to the conclusion that angel-funded businesses stand a high chance of succeeding compared to those that seek alternative forms of initial funding.

Many entrepreneurs prefer raising seed funds from their family and friends, but it is usually not an easy task to raise a substantial amount that can take care of the business’ initial needs. This makes angel investment the second most common financial assistance option and accounts for a large percentage of high-growth startups. There are no set limits for angle investors and they can provide a few thousand dollars to millions but they are usually very wary of the high risks involved.

Sectors that Attract Angel Investors

The diversity of business ideas is understandable and every entrepreneur would like to invest in an area of his or her interest and proficiency. However, not all industries will attract angels since the investors also have to asses a number of factors before deciding whether to invest in a start-up or not. In this regard, business ideas that fall into the following sectors are likely to appeal to the angel investors more, compared to other sectors.

Healthcare/medical:

Are you considering starting up a clinic or manufacturing some medical products? Well, angels have over the years shown interest in healthcare and medical related investments and you are likely to find one interested in your business.

Software Development:

The world has gone digital and entrepreneurs with a knack for software development that will enhance the digital world, enhance business processes and generally positively impact on the lives of people and organizations in most cases interest angels.

Biotechnology:

A lot is being said about biodiversity, environment and living things. Do you intend to use living things around you to come up with useful, eco-friendly products? Well, you can try angel investors; they might help with the seed capital.

Industrial/Energy:

Industries offer employment to millions of people around the world, and energy, especially solar and alternative sources seem to appeal more to some individual investors.

Retail:

Entrepreneurs interested in retailing various products to areas with little or no supply can also seem to receive higher angel funds.

Information Technology:

Information technology has revolutionized various aspects of human life. It is still a developing industry with a lot of growth potential, and if you believe this is an area you can focus on but are limited by capital, then try finding an angel investor.

The Nature of Angel Investment

It is not so easy to attract an angel investor to your business idea. You must first have a clear business plan, reasonable and measurable targets, and most importantly, choose a sector or industry that an investor will find useful. However, any investment in a start-up business is usually treated as one with tremendously high-risks and as a result requires higher return on investment.

You can never rule out the possibility of an early stage company from failing, in which case the angel investor losses the initial investment as well. Most of them usually invest in business with the potential to return not less than ten or more times their initial investment in five years and a clear exit strategy like initial public offering (IPO) or through an acquisition must be outlined.

The Bottom-Line

Angel investors vary in their demands on return on investment, the sectors of interest and the initial capital value they can float into a start-up business. Generally, they demand a high return on investment due to the high risks involved. This makes angel financing a costly source of funds.  Other cheaper sources of startup funds like taking loans from banks and other financial institutions have stringent rules and requirements that usually bar many start-ups from accessing start-up capital. However, it is highly recommended for businesses that exhibit high-growth potential.