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What Is An Angel Investor, And How Does Angel Investing Work?

what is an Angel Investor

What is an Angel Investor? An Angel investor is referred to as an individual with high net worth. These individuals provide financial backing to small startups and entrepreneurs. In return for their financial investment, they take ownership equity of the company. Although angel investing is risky, it offers potential high returns, as well as a satisfaction to the investor to make a startup strong enough to compete in the market.

Unlike venture capital firms that use their investment fund, angel investors use their own net worth to invest in startups and entrepreneurs. This increases their risk appetite a lot. In this article, you will learn some of the essential details of an angel investor and how the process of angel investing works. Then, we will share with you the best tips and ways through which you can become an angel investor. 

What Is An Angel Investor?

What Is An Angel Investor

When a new startup or business is in need of money, they turn to investors. An angel investor is one such entity or individual who offers the initial fund to a small business or startup and takes ownership equity in exchange.

According to Indeed.com,

Angel investors are individuals who fund early-stage businesses in exchange for equity in a company. Beyond traditional bonds and stocks, angel investments provide new ways to diversify investment portfolios. Learning about angel investment can help you understand how angel investment works and what are their pros and cons.

In most cases, an angel investor is an individual or an entity that is fully involved in funding startups and projects for fully professional purposes. In other cases, angel investors can also be wealthy family member/ friend/relative who is offering funds for a startup. The investor can make a one-time investment or an ongoing investment of cash in the business.

However, you must not consider angel investors as loan providers. They are just cashing in on an idea that they like to grow in a given industry. They are only expecting rewards in a situation where the business really takes off.

Read More: Private Equity Vs. Venture Capital: Key Differences

Angel Investing – How Does It Work?

Angel Investing - How Does It Work

As per the views in an article on Investopedia,

Most angel investors are relatively wealthy individuals who are looking for a higher rate of return than can be found in more traditional investment opportunities. They search for startups with intriguing ideas and invest their own money to help develop them further.

As already mentioned before, angel investors only invest in those ventures where they see growth opportunities. However, these ventures are by themselves very risky. As per various reports, it has been found that the success of such small ventures is only 11%. Hence, the investments of angel investors in those ventures are quite modest (an average of around $42,000). Hence, most angel investors do not spend more than 10% of their investment portfolio money on such risky ventures.

However, this factor cannot remove the importance of angel investors for businesses that have ideas and are in need of funding. An entrepreneur or a small business is always in search of angel investors who can offer some conventional financing to their businesses.

Angel investors, while funding, seek an equity stake or a seat on the board of directors of the business. These investors do not expect to get their money back if the idea does not succeed. Hence, in some cases, angel investments are more favorable for entrepreneurs.

How To Become An Angel Investor? – Steps To Follow

How To Become An Angel Investor - Steps To Follow

According to Investopedia,

Angel investors have a genuine interest in innovation and a desire to be involved. Many have been entrepreneurs in the past. Anyone who has the money and the desire to provide funding for startups can be an angel investor. They are welcomed by cash-hungry entrepreneurs who can’t get conventional bank loans or don’t want the burden of big debt until their ideas take off.”

The following are some of the steps that you will need to follow if you want to become an angel investor:

1. Get Your Qualifications

To become an angel investor, you will need to meet the standards of an accredited investor. You must have earned at least $200,000 in the past two years (or $300,000 along with a spouse). Otherwise, your net worth must be more than $1 million in investable assets. This restriction is present due to the high risks associated with angel investments.

Since accredited investors are financially better equipped to handle a loss if there is such a situation. However, there are still non-accredited investors available, which startups can approach.

2. Start Creating An Investment Portfolio

It is important for an angel investor to build an investment portfolio and gain varied experience in investing. With experience in a variety of areas, you will be able to learn how investments in assets work in the country. You can also work for a professional angel investor to see what they do while funding a startup or a small business.

3. Start Sourcing Deals

In their industry of expertise, angel investors have an established network of startup founders, entrepreneurs, and small-business owners. As an investor, you will need to maintain rapport with those connections on a regular basis. Hence, you will often hear about new startups where you can source deals effectively.

You can also collaborate with other angel investors or a group of investors to fund a particular business after you have formed an angel syndicate.

Read More: What Is Indemnity Insurance? And Its Different Types – Let’s Discover

Wrapping Up

What is an Angel Investor? – You can see from this article that angel investors offer the primary funding source for entrepreneurs and small businesses. However, these investors need to be content with the idea and prospects of the business and must be optimistic and hopeful for its growth. In return for the funding, these investors take ownership equity of the company.

However, this is a risky job, and angel investors do not risk more than 10% of their portfolio into investing in these businesses. What do you think is the importance of angel investors for small businesses and startups? Share your views in the comments section below.

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Soumava Goswami

A passionate writer and an avid reader, Soumava is academically inclined and loves writing on topics requiring deep research. Having 3+ years of experience, Soumava also loves writing blogs in other domains, including digital marketing, business, technology, travel, and sports.

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You will know if a company is merging or being acquired from the 8-K reports.  If you find it challenging to access these public data, go to the investor relations sections of their websites. Most of these reports are published there. Combining Fundamental and Technical Analysis Both are common ways of evaluating stocks. You can select or sort the priority order of stock before investment with any of these.  Fundamental Analysis Focuses on Business and Industry Conditions Fundamental stock analysis includes an assessment of the broad industrial data. You must investigate the company's current industrial situation, economic condition, and condition. If you are investigating all these factors, you are probably looking to make a long-term investment. Therefore, most people invest in fundamental analysis stocks for a long-term period.  Some statistical calculations commonly guide you during the fundamental analysis of stocks. 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However, you cannot ignore these credentials if you plan to invest in a stock for the long term.  Growth Investor's Strategy Do you know how growth investors sort their stocks. If you want to follow the growth investment strategy, you need to know about it too. Focuses On Prospects of a Company Growth investors mainly check the condition of a company. Then, they decide if you can purchase its stocks. However, their approach to the fundamental analysis of stocks is highly applicable to new and emerging companies.  Often, we are confused while investing in stocks of any newfound company. The company might have returned high revenues from its inception. The fundamental analysis of shares of the new companies is based mainly on their revenue returns. It does not matter if they are profitable from day one or not.  Looks For Solid Revenue Growth and Innovative Products Fundamental analysis of stocks is very important for Growth investors. They will get scanty stock charts of a new company. So, technical analysis of the stocks is complicated. They focus on specific areas while evaluating the prospects of a new stock. These are: If the company has had a growing or stable revenue trend since the beginning If the company is innovation-based or solves a vital market gap Comparing business performance against other emerging companies in the industry Deciding if the company will scale in the future  Value Investor's Strategy Value investors have different objectives. They mostly try to gain as much short term gain Possible. Fundamental Analysis of Stocks Focuses on Companies Priced Below Their Fundamental Metrics The value investors always go by the book. They check the accurate financial health of the company first. They consider the company's financial health to be more important than its current stock value.  For instance, ba stock twits show Boeing stock will decrease in Q2. However, management decided to go slow this quarter despite pending orders.  It means that the slump in stock price that you see now is not the reality. Their stocks will perform better in Q3 and Q4.  Like Boeing, most companies that have passed their peak grossing years can also provide stable dividends to inventors. These companies will have a low P/E ratio.  But their investors will get good returns. Value investors inspect such stocks only.  Fundamental analysis of stocks is essential to learn about this kind of stock. Screening for Growth or Value You may want to invest in a stock for two factors: It's high yielding now It returns steady dividends for a long time  The former are called growth stocks, and the latter are value stocks. The stock you will pick depends on the goal and priorities that you have set.  Tools like Schwab.com help to screen stock according to these two parameters. If you aim at a fundamental analysis stock, you must buy the stocks rated A or B, as per the Schwab Equity Ratings®.  The stocks listed C, D, or E might give good dividends now. But these are not the most stable ones. Hence, these stocks are not suitable for your current investment plan. Use Stock Screening Tools To Narrow Down Quality Growth Or Value Candidates You already know how to select the value stocks. But which one will you mainly buy? Worried! I have already mentioned the factors that you must look for. The stock should have an above-average yield. That's the essential criteria of stock fundamentals analysis. At the same time, the stock should have a low P/E ratio. The low ratio suggests that the stock value will increase in the future.  But if you are looking for a growth stock, please focus on different parameters. You will consider the company's earnings growth in FY 2023-24. Then, consider the company's EPS growth ratio in the current year. 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