Entrepreneurship can be bring large rewards, both financial and personal, but it is not for the faint of heart. Roughly 20% of businesses do not survive their first year, 50% do not make it past five years and only 33% survive to ten years. The major reasons why businesses fail is that it does not solve a consumer need, lack of capital, the wrong management team, competition and pricing (Otar, 2018). Prior to starting a business it is vital that the founder craft a thorough, well-thought out and well detailed business plan, especially in light of common failures. Once a founder has created their plan, they are left with how to fund it. Unfortunately, the access to capital early on is difficult; the founder can rely on credit cards, cash savings and collateralized loans on their assets, or seek money from friends and family (Morrissette, 2007). For businesses that demonstrate strong growth potential, venture capital firms are also available. However, another option exists in the form of Angel investors, or micro funding.
An angel investor is someone who puts up their capital, in the form of debt of equity, to invest in the business of someone that is not a friend of a family member (Shane, 2012). Angel investors can serve a vital need in the business community by providing debt or equity financing to small businesses looking to start. Like all investors, angels want to see a return on their investment (Sudek, 2006-2007), however, they also demonstrate more altruistic reasons for investing, such as generating psyching income in the form of helping to create growth and jobs in their local community (Morrissette, 2007) or by having a desire to coach and mentor a young entrepreneur and have the ability to help a young business grow (Edelman, Manolova, & Brush, 2017). Aside from proving capital, Angel investors also generally have a desire to work in the businesses that they fund by investing their own time and expertise into the business, in addition to their money (Shane, 2012). This allows founders to essentially access partners who want to work alongside them to help them succeed.
While Angel investors may differ in their motivations, they tend to want to invest in businesses where the founder(s) is passionate and trustworthy, they have faith in the management team and there is an exit strategy (Sudek, 2006-2007). Angel investors may also choose to form a syndicate of a portal to pool their funds together, but each investors still makes their own individual decision on whether or not to provide capital to a business. This means that the personality of the founder(s) is extremely important (Sudek, Mitteness, & Baucus, 2008), with those being perceived as conscientious and tough more likely to obtain funding (Murnieks, Sudek, & Wiltbanks, 2015). The amount of funding also varies, from the low thousands to several hundred thousand (Shane, 2012). They also tend to have a 4-6 year investment horizon in which to see a return (Sudek, 2006-2007). Once an Angel investor listens to a pitch from the founder, they have to make a decision on whether or not to perform due diligence (further evaluation) and invest (Sudek, Mitteness, & Baucus, 2008). Since most angel investors do not use as formal an evaluation process as a venture capital firm does, this can be a prime opportunity for investors to pitch their idea when they are still the early stage of launching their business. Gender differences also exist, with few female founders seeking outside Angel capital, as little as 5% (Florin, Dino, & Huvaj, 2013).
For entrepreneurs looking to start a business, thoughtfulness of the product and access to capital are vitally important to sustainability. Angel investing can be a great way to seek additional capital. Many Angel investment deals are fairly simple, either an equity stake for capital or a loan, but they can get more complex and mirror venture capital type structure of convertible preferred shares for companies that exhibit high growth and early exit potential (Shane, 2005). Either way, the benefits to the founder are many; not only are they able to access capital when they need it, but they are also accessing expertise, desire for success and a connected network that can be used for further growth. They may be hard to find, depending on the location, but an Angel investor may be just what entrepreneurs need to help their business succeed.
Edelman, L. F., Manolova, T. S., Brush, C. G. (2017). Angel investing: A literature review. Foundations and Trends in Entrepreneurship, 13(4-5).
Florin, J., Dino, R. & Huvaj, M. N. (2013). Research on angel investing: A multilevel framework for an emerging domain of inquiry. Venture Capital, 15(1), 1-27.
Morrissette, S. G. (2007, Summer). A profile of angel investors. The Journal of Private Equity, 52-66.
Murnieks, C. Y., Sudek, R., & Wiltbank, R. (2015). The role of personality in angel investing. Entrepreneurship and Innovation, 16(1), 19-31.
Otar, C. (2018, October 25). What percentage of small businesses fail: And how you can avoid being one of them. Forbes. Retrieved from https://www.forbes.com/sites/forbesfinancecouncil/2018/10/25/what-percentage-of-small-businesses-fail-and-how-can-you-avoid-being-one-of-them/#3db3161843b5
Shane, S. (2005). Angel investing: A report prepared for the Federal Reserve Banks of Atlanta, Cleveland, Kansas City, Philadelphia and Richmond. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1142687
Shane, S. (2012). The importance of angel investing in financing the growth of entrepreneurial ventures. Quarterly Journal of Finance, 2(2), 1-42.
Sudek, R. (2006-2007). Angel investment criteria. Journal of Small Business Strategy, 17(2), 89-103.
Sudek, R., Mitteness, C. R., & Baucus, M. S. (2008, August). Betting on the horse or on the jockey: The impact of expertise on angel investing. In Academy of Management Proceeding, 2008(1), 1-6. Briarcliff Manor, NY 10510: Academy of Management.
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