The pros and cons of angel investing Essay
Business angels are individuals and private companies, which invest part of their own funds in innovative companies at the early stages of development (“seed” and “start -up”). Business angels are the first professional investors who invest in innovative companies, and the volume of business angel investment in a company can vary from a few tens of thousands to a million dollars. (Robinson, 2000)
It is important that business angels use a new venture investment mechanism, under which funding is provided on long-term (3-7 years), with no collateral and guarantees for the share in the company. The risks of such investments are reduced by investing simultaneously in several companies, due diligence and selection of projects, participation in business management. The success of the business angel investment is largely achieved through the creation of favorable business and friendly relations between investors, inventors, and managers of the company, they work together as a team. (Robinson, 2000)
The investment objective of business angels is the rising cost of invested companies, by developing and promotion of high-tech products. The main income business angel gets at the “exit”, by selling his shares with much higher price than the initial investment. The sale may be made in the stock market, to a strategic investor or the founders of the company. Despite the high risks of business angel investing, it is one of the most profitable lines of business, that can offer the investor not less than 40% per annum. (Robinson, 2000)
Business angels are considering Start – up projects – the companies at the stage of development, when it is recently formed, has prototypes and is trying to organize production and to enter the market. For example we can consider the case of “Dragons Den Nova-flo Pitch”. This is a case when a young innovator proposes his invention called “Nova-flo” to business angels. He talks about his new invention, and shows it in action, talks about potentials of the product. When choosing a project to invest Business-Angels are trying to feel not only the market and prospects of the project, but also the personality of its founder. Very often the decision on investment is based on a belief that the entrepreneur is able to realize his project. Therefore, the task of entrepreneurs, willing to attract investment in their project, is to create a confidence in his product. Business angels prefer to invest in innovators, who offer not only the idea, but also a system of implementation (plan of actions, resources and sales), who already have experience of building his own business. Ideally, a business angel and entrepreneur should be like-minded people, to “feel the wave” to each other, who do not have conflicting business issues. The entrepreneur must be clearly understood that the business angel is co-owner of his business, and he can have a significant amount of management functions, he also can hire his own employees, such as the chief accountant, financial director or sales manager. So initially, it is important that the entrepreneur and business angel have a good relationship of trust, willingness to compromise. In addition, the project should have a strong team, able to realize it.
Business angel is a combination of a number of qualities, he is not just an investor, but also a good manager and specialist in business sphere, a person with knowledge in specific areas, who knows how to build this business, what risks will arise, and what to do to minimize them. But having no ideas and technologies, he is looking for highly innovative projects. Business angel, in contrast to the investment funds, has not only money, but the so-called “smart money”, which cost and value is much higher, and this is certainly a plus of angel investing. (Robinson, 2000)
Advantages of angel investors compared with institutional venture capital funds:
1) The total volume of investments of business angels is 4-5 times higher than of investment venture capital funds;
2) angel investors often fund small businesses in the early stages of their development;
3) business angel investors provide companies with comprehensive support in the development of management, marketing strategy, networking, business planning, etc.
4) The due diligence process will be less rigorous since angels are acting in their own interest
5) Angels are generally more vertical specialists than compared to VC’s (Bukovsky, 2008)
Of course, we can not help saying about the problems of this type of financing. The first question that arises is the know-how: what will be with the idea? Can investor take it himself? This is a very problematic issue, because no one can be saved from the unscrupulous actions in the market. But investors always answer categorically on this question: if the inventor is afraid that the idea will be stolen before signing the documents, it means that his idea is not so good, if it is easy to steal it. However, the most reliable way is to obtain a patent. The next important issue to consider is what part of the future company will be owned by investor? First of all, it is necessary to pay attention to: the ratio of shares and then what actions each party has (preferred or common); the right to withdraw and to sale the shares; pre-emptive rights, options, terms, rights and obligations of the parties, etc. In all these respects startups can not do without skilled assistance of a lawyer.
In conclusion it is possible to say that business angel investing is one of the most important elements of the new economy – the economy of knowledge. By investing in technology, intelligence, creative teams, business angel lays the future prosperity for themselves, partners and the whole country.
