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What is an angel investor and where would I find one?

Read this guide before you approach an angel or private investor for funding.

Entrepreneur

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What is an angel investor?

An angel investor may be a firm or an individual who invests in start-up companies. Angels rarely get involved in the actual management of the companies in which they invest, but they provide enough capital to bring a product to production stage.

Originally a term used to describe investors in Broadway shows; “angel” now refers to anyone who invests his or her money in an entrepreneurial company (unlike institutional venture capitalists, who invest other people’s money).

Angel investing has soared in recent years as a growing number of individuals seek better returns on their money than they can get from traditional investment vehicles. Contrary to popular belief, most angels are not millionaires. Typically, they can earn below R500 000 a year. Which means there are likely to be plenty of them right in your own backyard.

Angels come in two varieties: those you know and those you don’t know.

They may include professionals such as doctors and lawyers; business associates such as executives, suppliers and customers; and even other entrepreneurs. Unlike venture capitalists and bankers, many angels are not motivated solely by profit. Particularly if your angel is a current or former entrepreneur, he or she may be motivated as much by the enjoyment of helping a young business succeed as by the money he or she stands to gain.

Angels are more likely than venture capitalists to be persuaded by an entrepreneur’s drive to succeed, persistence and mental discipline. Angel investors vary widely, but they are typically willing to accept risk and demand little or no control in return for the chance to own a piece of a business that may be valuable someday.

Choose the right angel investor

The best kind of angel investor is one with the right background so that you could, if need be, ask him or her to take a more active role in the company. If the investor is internationally based this could be difficult.

Types of angel investors

Angels can be classified into two groups: affiliated and non-affiliated. An affiliated angel is someone who has some sort of contact with you or your business but is not necessarily related to or acquainted with you. A non-affiliated angel has no connection with either you or your business.

Affiliated Angels

It makes sense to start your investor search by seeking an affiliated angel since he or she is already familiar with you or your business and has a vested interest in the relationship. Begin by jotting down names of people who might fit the category of affiliated angel:

  1. Professionals. These include professional providers of services you now use – doctors, dentists, lawyers, accountants and so on. You know these people, so an appointment should be easy to arrange. Professionals usually have discretionary income available to invest in outside projects, and if they’re not interested, they may be able to recommend a colleague who is.
  2. Business associates. These are people you come in contact with during the normal course of your business day. They can be divided into four subgroups:
  3. Suppliers. The owners of companies who supply your inventory and other needs have a vital interest in your company’s success and make excellent angels. A supplier’s investment may not come in the form of cash but in the form of better payment terms or cheaper prices. Suppliers might even use their credit to help you get a loan.
  4. Customers. These are especially good contacts if they use your product or service to make or sell their own goods. List all the customers with whom you have this sort of business relationship.
  5. Employees. Some of your key employees may be sitting on unused equity in their homes that would make excellent collateral for a business loan to your business. There is no greater incentive to an employee than to share ownership in the company for which he or she works.
  6. Competitors. These include owners of similar companies you don’t directly compete with. If a competitor is doing business in another part of the country and doesn’t infringe on your territory, he or she may be an empathetic investor and may share not only capital, but information as well.

Non-Affiliated Angels

The non-affiliated angel category includes:

  1. Professionals. This group can include lawyers, accountants, consultants and brokers whom you don’t know personally or do business with.
  2. Middle managers. Angels in middle management positions start investing in small businesses for two major reasons – either they are bored with their jobs and are looking for outside interests, or they are nearing retirement and fear they’re being phased out.
  3. Entrepreneurs. These angels are (or have been) successful in their own businesses and like investing in other entrepreneurial ventures. Entrepreneurs who are familiar with your industry make excellent investors.

 

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Funding

What do I need to do in order to get a successful crowd funding campaign?

Advice on getting the gold you need for your crowd funding campaign.

Ambassador Tal Edgars

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I recently read through crowd funding and though this might be of benefit to me. What do I need to do in order to get a successful crowd funding campaign?

70 percent of most crowd funding campaigns never reach their funding laid out plan. If you only reach a portion of your desired pledge amount all donated funds are then returned to investors once your campaign date is up. Do your homework and make your campaign count.

To get the best out of your campaign, I would strongly advise you do the following:

  1. Lay out your plan way in advance
  2. Keep a proper and well-articulated business plan
  3. Create a compelling story.
  4. Use the social media and start a social media campaign
  5. Frequently promote your fundraiser, connect and interact
  6. Dish out rewards and incentives
  7. To go viral, go for educative, informative and entertaining videos
  8. Be more than unique and creative as more exposure will translate to more potential pledges
  9. Choose the right crowd funding site for you.
  10. Know and understand your end target audience

 

 

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Funding

Where can I turn when banks are not helping?

Getting bank finance for my restaurant is almost impossible.

David Lewis

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Getting bank finance for my restaurant is almost impossible.  How else can I access the funding that I need?

Most small businesses will experience a cash flow challenge at some point during the next 12 months and raising capital from traditional banks is becoming a real challenge. Conservative lending policies and onerous application processes mean that finance applications can take up to twelve weeks or longer.

Banks require significant securities, which many business owners are unable to meet. In short, banks are making it very tough for small businesses.

The business cash advance

For businesses that accept credit or debit cards as a form of payment for their goods and services (termed merchants), the business cash advance is now available as alternative source of funding.

In simple terms, a business cash advance offers the merchant an upfront advance to buy a discounted amount of future business turnover.  For example, you may be advanced R80,000 for R100,000 of future turnover, so the fees can be easily calculated as R20,000.

The payback is an agreed percentage of your turnover, paid daily until the full amount is paid across.  Payback increases and drops with your business turnover and the smaller daily payments are often easier than monthly fixed instalments.

Quicker turn-around and more accessible

Comparing it to a bank loan, the business cash advance is more accessible, operates over a shorter term and requires no personal security.  It is also much faster, typically available within two weeks.

The advance amount is based on historical credit and debit card sales and pay overs are daily.   The costs are fully transparent and there are no penalties for late payments or extended payback.    However, accessibility, flexibility and convenience come at higher cost than traditional bank lending products.

As with any financial product, it is important that the benefits gained from using the money are more than the costs, so it is important to have a good purpose for the funding and carefully consider the available options.

Over the last three years, the business cash advance has becoming more main-stream and this funding is used by business with a relatively high card turnover, such as restaurants, retailers, beauty salons, supermarkets, convenience stores etc.

What to use the advance for

The advance is typically used for a business opportunity, such as expansion, new stock, new equipment, marketing etc.  Alternatively, it also offers through a difficult trading period or to cover an unexpected expense such as equipment failure when the money is needed quickly.

Small businesses are a vital part of the South African economy, contributing over 65% of South Africa’s employment and over 50% of GDP – accessing funding is imperative for these businesses to survive and grow.

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Funding

Am I stupid to turn down a VC investor?

Bootstrapping your business initially will pay dividends down the line.

Michelle Goodman

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I’ve started my own business two years ago and I’ve recently been approached by venture capitalist investors. While I could really use the funding, I’m reluctant to give away a large portion of my business at this early stage. What should I do? 

While it’s exciting to be approached by investors at any stage in your business, in the early years it might be better for the business to keep it small, keep your overheads low and bootstrap your venture as much as you can. This not only allows you to build a viable business and product offering at your own speed, it means you can to do without creating a huge amount of debt.

By building a sound and profitable business model from the outset, you will attract more attractive funding offers down the line.

Read the full article here.

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