0The 21st century is known as the entrepreneur age where numbers of young & enthusiastic individuals are starting up their own ventures individually or collectively. Today most of these companies are built upon innovative ideas that were formed at the inception stage of a company. When an individual or a group has generated an idea to start a venture the main obstacles they face is lack of funds. At the initial stage they invest their savings, take help from family and friends and set up the business. The main problem arises when they need capital to meet the daily operational costs and for future expansion plans. Taking loans from banks or financial institutions is not advisable for start-up ventures at this stage due to the burden of the EMI on the working capital. Also they require lot of documentation and collateral and the loan approval process can be tedious.
In this scenario we have individuals known as angel investors who push in their own funds in businesses which have high potential for growth. The word ‘Angel Investor’ came up in the US when wealthy individuals invested their surplus incomes into the production house of the Broadway theatre so that they could commence operations otherwise it would shut down. Their contributions were compared to help from angels.
Below are the benefits which are helpful for start up ventures:
- Funding at the initial stage of business
- The time span of investment decision is also less as they invest their own funds
- Most of the angel investors are entrepreneurs themselves so they tend to share their experiences and knowledge which can help the business grow
- They invest in the business without any collateral and have high risk appetite and have a very optimistic approach.
- The documentation is minimum. In some cases it is just a case of mutual trust.
- They do not charge monthly interests or repayments which lessens the financial burden on the business instead they tend to take a share in profit distribution or a stake in the business. One companies issue equity shares some angel investors liquidate their investments
- Some Angel investors tend to invest in business of their interest or in their neighbourhood areas as a sense of social responsibility.
All these things make angel investors a very cost efficient and lucrative method for start up ventures who are looking for the initial capital for their operational and expansion plans.
There are few drawbacks about Angel investing which can affect the owners of the business:
- They will need to give up a percentage of stakes in their share capital which can prove to be costly.
- Some investors try to interfere in the day to day operations as they own a stake in the business.
- They may also ask for the return of their investments at any period of time without any prior notice.
- Due to lack of documentation between both parties there can be cases of forgery and disputes.
Hence an entrepreneur needs to be very careful and should conduct a thorough study before approaching an angel investor. The background of the investor, his risk appetite, his patience level, review of his past financial decisions all these characteristics need to be kept in mind. It is always better to have some sort of legal document such as Memorandum of Understanding, or a an agreement contract between the two parties to avoid future disputes and all details such as the percentage of stake issued to the investor and the time span for which the investment is made all this needs to be documented.
Silicon Valley in the US has provided funds to various starts up companies which in turn has lead to revenue and employment generation. In India, there is now a sudden rise of angel investors with individuals like Cricketer Yuvraj Singh starting ‘You WeCan Ventures’ which funds business with new and innovative ideas then Sachin Bansal of Flip kart who invested in companies such as Madrat games, Spoonjoy and more. Most of the investments are in the field of Technology as we move into the age of computers. Innovative software, applications and social networking websites have a huge scope and most of the investments are diverted into that sector. Nowadays Government has also launched initiates such as MUDRA bank to support small medium enterprises to handle their finances.
For an entrepreneur it is important that he displays hi business plan in a very well planned format. The goals, future projections, capital requirements all must be put forward to the investor and he should be in clear frame of mind before investing in the business and should believe in the venture.
