Angel financing is made up of a group of investors referred to as angel investors. There are pros and cons to this type of funding.
Angel investors, like the term implies, can be a gift from heaven when it comes to raising seed money for your startup small business.
Angels typically are high risk investors, used when you have no funds personally to tap into for starting your venture, and before serious second round financing, such as with banks or venture capitalists begin.
Angels investors are usually wealthy individuals looking to invest for high return.
They sometimes form themselves into investment groups, and usually aim for convertible debt or ownership equity in return for their seed money in your business.
This is their personal money, unlike venture capitalists that are representing pools of investors. The amount of money you can get from Angels varies wildly, but it is usually under a million dollars.
The average amount that U.S. companies utilizing Angel financing in 2007 received was $450,000. In practice, the amount you can raise can be anywhere from a few thousand to a couple of million.
There are somewhere between 200,000 to 600,000 Angel investors in the U.S.
As you can imagine, it's a difficult number to quantify. Many people can act as an Angel without forming a group, or even making more than a single investment, so don't rule anyone out!
Precisely because Angel investments are at such high risk of loss, they require significant incentive to get involved with you in the first place.
Because a large percentage of Angel investments are total losses when startups fail, Angels typically seek investments that have the potential of returning more than 10 times the initial investment.
Some will seek numbers much higher, in the 20-30 times investment over a set period of years; others will settle in the neighborhood of 5-7.
This can seem very expensive to the fledgling business owner, but the reality is that when you're a new business, with no reputation, credit or resources, less expensive avenues of capital may not be open to you. An Angel could be an answer to prayer!
