Angel Investors: Definition, Types, and Their Advantages and Disadvantages

Angel investor is a term given to someone who funds a business personally or privately.

Well, usually angel investors have their own agreement with the business owner, different from venture capital companies.

The involvement and benefits that angel investors will get in the business they fund also vary.

Some provide investment for special projects, or ongoing capital to help businesses in the early stages.

What exactly is an angel investor and what do you need to know? You can learn about it through the article below. Read until the end, okay!

Definition of Angel Investor

Quoted from Investopedia, an angel investor is a term for an individual who provides initial funds for a startup business, usually in return for equity ownership of the company.

Angel investors usually focus on providing financial assistance to small business ventures or small businesses.

Reporting from the Corporate Finance Institute, the term 'angel' in angel investor originated from Broadway theater, where an individual provided money for a theater production.

After financing the production, this individual then gets profit from the show that has been running.

Founder of the Center for Venture Research, William Wetzel finally coined the term 'angel investor' in 1978.

Although angel investors seem to not have too many demands or clauses, they still want profit.

Angel investor involvement can be in the form of funding a series of special projects between friends or family only.

Or this involvement can be in the form of providing funds at the beginning or providing funds continuously for a certain period of time according to the agreement.

Angel investors are funders who are slightly freer. They usually provide funds to business ideas that they think are interesting and have the potential to develop well.

Types of Angel Investors

From various sources, it is explained that angel investors consist of several different types. The following are the types of angel investors in the business realm:

1. Family (The Family Investor)

Quoted from Inc, angel investors from families or also commonly called the family investor are the classic type because they come from the family.

The motivation of an angel investor from the family to provide funds is usually to support each other, based on trust and support.

However, one of the drawbacks of this type of angel investor is that it is too personal and prone to problems.

2. Group (Angel Group)

Not only from individuals or alone, angel investors can also come in groups, this type is called an angel group.

Angel investors who are in groups or angel groups are formal organizations consisting of individual angel investors who join together to invest in startups.

Usually if there is a possibility of funding a business, the founder of the startup or business to be funded must meet the decision maker in the group.

LinkedIn says that decision makers in this organization then conduct due diligence, check finances, market research, and ultimately make investment decisions.

3. Individual

Individual angel investors are usually someone who already has experience as an investor with a high level of success.

It will be easier to see the potential and evaluate the investment funds that will be given to a particular startup.

The advantage of individual angel investors is that agreements usually occur effectively and in a short period of time.

Some even say that individual angel investors are 'super-angels' because they provide investments in large amounts and the process is efficient.

4. Idea (The Idea Investor)

Angel investors who invest because of the ideas offered by startups are usually called the idea investor.

The idea investor may come from the same field as the startup that wants to be developed.

Angel investors who are interested in ideas and come from the same field are often good types of angel investors.

Not only will they fund, but the same scope of work can also help founders get advice on the idea.

In addition, personally, the idea investor will not be too personal like an angel investor from the family.

The idea investor will also open networks and relationships that will not only help the business but also provide advice for the business being developed.

Advantages and Disadvantages of Angel Investors

Unlike venture capitalists who do have 'big money' or a certain budget for investment, angel investors are different from them.

Therefore, there will still be advantages and disadvantages of angel investors.

As reported by The Hartford, here are the advantages and disadvantages of angel investors that you should know:

Advantages of Angel Investors

Getting an angel investor means you don't have to return the funds that have been invested by the angel investor to your business.

Investopedia adds that a founder or business person looks for angel investors to get 'security' in financial terms.

When developing a business, angel investors are the right choice because they do not ask for compensation in the form of money back but the success of the business is the main goal.

Disadvantages of Angel Investors

The Hartford emphasizes that one of the disadvantages of angel investors is that they usually ask for 10-50% of the business as a refund.

That means, you as a business owner can easily lose control of your own business if there is a mistake or failure in the business.

Therefore, before agreeing to the involvement of angel investors, returns in the form of equity also need to be considered and discussed properly.

Don't lose your own business because of the involvement of angel investors.

Making clear financial reports and appropriate business plans and strategies will open up opportunities to get angel investors for your business wide open.

It is important to understand financial analysis to form financial statements and financial reports that are clear and attractive to investors.

To develop a business, this is very crucial. Are you interested in learning financial report analysis better?

Don't miss the opportunity to learn by taking the Financial Analysis class at Prasetiya Mulya Executive Learning Institute, now!