Tech Word For The Week is a weekly series where we look to explain commonly used words in the tech ecosystem in a simple, engaging way.
An Angel Investor is an individual who provides capital for startups to start operations or expand in exchange for equity.
Angel investors are slightly different from venture capital. They are usually high net worth individuals who have enough excess funds to invest in untested but promising startups who can give them higher returns than traditional financial institutions. Let’s dive in deeper.
If venture capital is a partnership (where you have limited and general partners) then, angel investors are sole proprietors. They are high networth individuals who provide the early cheques for startups to begin or expand their operations. Angel investors are also called angel funders, business angels, informal investors, private investors, and seed investors.
Most startups lack sufficient cash and are too risky for financial institutions. The source of capital available to access at that early stage are savings or funds gotten from family and friends. Angel investors can be the founder’s acquaintance or a friend’s friend. They invest because they have personal interest or belief in the team or founders.
Angel investors are a better source of financing to founders compared to other predatory sources of financing. They are concerned with assisting startups to execute their ideas. Unlike venture capital that pools the investment of different investors together, angel investors use their personal funds. This means that their investments are smaller compared to venture capital.
Individual angel investors also pool their resources together to invest in businesses under an angel investor network or syndicate and crowdfunding platforms. But every member of the group actively participates in making investment decisions.
Angel investors can also metamorphose to venture capitalists or create a venture capital firm where other investors are admitted as partners. For example, serial Nigerian investor, Olumide Soyombo started out as an angel investor and invested profitably in several Nigerian startups. Recently he expanded by creating Voltron Capital, a Venture capital firm.
Some critical metrics that guide the Investment decision of Angel Investors
- The minimal viable product and evidence of getting traction.
- The quality and commitment of the founders or the team.
- Product market fit.
- Interesting and innovative technology.
- A succinct valuation with reasonable terms and the potential to raise funds to expand in the future.
Benefits of Angel Investors
A major benefit of obtaining funds from angel investors is that most angel investors understand the risk of running a business. They are willing to assist the business succeed and are considerate if the business fails. They understand the risk of infusing capital into an unproven startup - if the business fails so does their investment. Funds obtained from angel investors are therefore less risky compared to debt.
Founders can also leverage the network, experience and expertise of angel investors. Angel investors are most times former founders, senior business executives, and high networth individuals. Because they want the startup to succeed, they’ll be willing to offer a helping hand whenever necessary.
For the angel investor, investing in promising startups is a great way to get a higher return on investment if the startup succeeds. Their returns could be as high as 22%. Most conventional financial institutions will not offer this kind of returns.
Over the years, the need to invest in the Sub-Saharan Africa tech ecosystem has increased due to the rise of innovative startups. However, founders who are looking to attract angel investors should be clear on what they need.
They should also ensure that the angel investors are big picture thinkers whose values align with what they are trying to build. Angel investors should endeavour to carry out a thorough background check before they inject funds into any startup to be sure that cash infused will be well spent.