Angel investment is the injection of capital made by individuals in startups or companies that are in the early stages of their life cycle, usually in exchange of shares of the company. Investment tickets are usually in the order of USD 30,000 to USD 250,000, and in some cases may be greater than this. These investments are high risk associated with high returns. To mitigate this risk to investors and avoid giving up too much shares on a very early stage of the life cycle, ventures usually structure the fundraising strategy in several rounds.
The angel investment stage presents some particular characteristics:
a) The entrepreneur has already validated his/her business idea.
b) Typically these amounts are difficult to raise from sources such as family and friends.
c) Usually VCs are not interested to invest in this stage because they seek more mature startups. Likewise, banks generally do not cover this stage due to its high risk, lack of guarantees and maturity stage of the project, which makes it very difficult to estimate the loan repayment capacity.
Angel investors are individuals who funds companies on early stages. The most differentiating characteristic is that they provide “smart capital”: they not only contribute financially to the costs of the companies they participate, but they are also interested in sharing their expertise, background and networking, among other things.
Investing in startups involves
Investing in startups involves a high level of risk, therefore, one of the strategies that angel investors usually implement is diversification. In this case, and fundamentally when liquidity is limited, an interesting alternative to structure are the “investment syndicates” to co-invest together with other investors. For this to happen, is essential to develop personal relationships with other angels so that there is trust among them. The goal of Xcala community is to strengthen ties among investors.
The beginnings of angel investment and the angel networks
The concept of angel investment started on the 19th century in New York as a way to fund Broadway shows. After more than a century of low activity, for the last 30 years the angel investment industry has grown considerably. In the early 1980s, investors began to get together in order to co-invest and to brainstorm on new investment opportunities. Over time, this trend has been formalized, giving birth to angel networks, which are organizations that identify high-potential entrepreneurs and connects them with angel investors who are willing to tap into good opportunities.
The angel networks have been essential for the development of the industry and their main benefits are:
a) Democratization of the investment process, making possible for any startup to applied to the selection process of any angel network.
b) Significant increase of investment opportunities to be evaluated by angels investors.
c) Rigorous process where these opportunities are filtered according to investors criteria.
d) Assistance in entrepreneur-investor communication to align interests and avoid misunderstandings.
e) Training and mentoring programs address to entrepreneurs and investors, and the setup of events and venues in order to foster trust and networking, among others.