Angel investors are individuals who
invest their own funds in early stage companies or startups, unlike VCs who
manage the pooled money of others in a professionally managed fund.
Angel investors typically invest at the
power-point or paper concept stage i.e. at the very concept stage of a company.
In effect, they are taking a bet on the team and on their belief that the
concept would work.
Angels would most likely invest smaller
amounts, which is usually sufficient to cover the fund requirements for going
past the proof-of-concept stage. Angel rounds will most likely be followed by
rounds of institutional funding like VC and strategic investment or
acquisition.
At the stage at which angel investors
invest, the risk is the highest. This is because neither is the concept proven,
nor the business model nor the team’s capability to deliver proven. Moreover,
because angel rounds are usually followed by further rounds to fund the capital
requirements for growth, angel investor’s equity in the company gets diluted in
further rounds of investments.
Because their investments carry their
highest risk and dilution, the valuation
offered by angel investors will be the lower than those offered by VCs in the
subsequent rounds when the business has been significantly de-risked.
Often, angel investors invest in
domains they are passionate about, and therefore bring invaluable experience to
the startup through their participation as advisors and/or board members. Angel
investors, apart from capital, are expected to help startups with advice,
networking & introductions and oversight of business. Some angel investors
also go to the extent of representing the startup in PR or meeting important
customers or in interviewing potential senior employees. Most certainly, angel
investors are expected to assist the startup in accessing institutional capital
for subsequent rounds of funding.
