Angel Investor Definition | How It Works

October 24, 2022
Angel Investor Definition | How It Works

Angel investment is the main source of external equity funding, financing, and fiscal support for start-ups in numerous countries. It is normally overlooked as angel investors are usually not visible. However, after the recent economic crisis and unrelenting hard economic conditions, angel investors have played a vital role in filling fiscal gaps left by the banking sector and venture capital organizations.

Angel investment is regulated by the Financial Conduct Authority, which states that angel investors should self-certify as high net worth investors.

 

So, What is an Angel Investor?

Let’s start with angel investor definition. Entrepreneurs with broad experience in the business arena are generally called angel investors. An angel investor invests his own money for a marginal stake in a small business. The marginality of stake is normally between 10% and 25%. An organization can pass through its hard time in the business with the help of the funds provided by angel investors, which can be a one-time investment. Alongside the investment, they also provide business companies with strategic, economic, and sector-based advice for growth attainment.

You can retain control of your business even after using angel investment, as angel investors normally take a 10% to 25% share of your business. Angel investment is right for almost all business sectors but particularly appropriate for organizations with scalable business proposals. Angel investors do not only offer funds but mentoring and strategic guidance as well.

However, they do not give any guarantee that your business will enjoy growth because of the investment and their involvement.

When you search for angel investors, you need to make sure that the angel investors you select are genuine and specialized. The two central regulations you should know are Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).

EIS and SEIS give angels substantial tax breaks. These schemes help companies grow by making investments less risky for investors. Under Enterprise Investment Scheme, angel investors have to take a business share of less than a 30%, which ensures that entrepreneurs are incentivized.

How Does It Work?

Angel investors can provide funds alone, but generally, they prefer investing together as an association. When they invest in a business as an organization, the principal angel is the one who organizes the investment agreement.

Angel investors who finance a business firm that fails in its early operational phase lose their investments wholly. This is why trained angel investors search for opportunities for a clear withdrawal strategy or acquisitions.

The actual internal return rate for a fruitful portfolio for angel investors is around 22%.

Angel Investors are Important for Many Businesses

All this sounds good for angel investors but appears too costly for entrepreneurs in the initial business phase. Moreover, low-cost financing channels, for instance, banks, are generally unavailable to these business ventures, which makes angel investors suitable for financially struggling entrepreneurs.

In short, getting angel investors involved will not happen overnight; therefore, you must research and stay connected with the network. It generally takes around six months from your first investor to the angel investor to get funding.

 

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