Angel investors are not Santa. But this is good news
If you have reached this blogpost, this means you have done your homework and you know the academic definition of an angel investor: the term originates from the financers of the plays on Broadway and refers to a person who ensures the cash flow of an incipient business usually with their own money.
It sounds romantic, as in a play: a young man with a dream that might change the world is visited one night by a supernatural creature, filthy reach, who helps him make the dream come true and, of course, to change the world. However, you can figure it out that reality is actually different:
- Angel investors finance startups, therefore need other guarantees than the profit margin. It is very simple: startups do not generate profit in the incipient stages and the contributions in capital of the first investors replace exactly this kind of profitability. That is why the investment they make at time zero will be subsequently converted in shares or in another form of participation to business.
- Angel investors usually invest their own money, which makes them more involved in the business in which they invest. It is all but natural that they want to keep close to the entrepreneurs they finance, to ask questions and expect information on the evolution of the business. That is why the investments are made on phases: according to the success of the first phases, the subsequent funding is ensured.
- Angel investors offer more favorable conditions on a short and medium term than the banks or the investment funds. They do not require either interests or dividends, but that is exactly why they expect, on the long run, profitability (Internal Rate of Return) of 20-30%.
However, if you consider these constraints more thoroughly, you realize they are in fact benefits. The questions asked by a competent angel investor are not obstacles, but tools that help you clarify the objectives. The experience brought about by this kind of financers from other businesses means a contribution of financial culture and not only. Also, remember: a person who is not a parent, nor a spouse has been willing to invest their money in you and this obligates you and makes you a better performing entrepreneur.
In a nutshell, a good angel investor is not necessarily measured by the number of zeros of the amount they make available to you. Together with that money, you can win an experienced partner, a sort of brains of your business, which influences you for the better, affecting neither your capacity of entrepreneur nor the reputation that comes with success.