Question

Please read the short case and answer the 3 questions thank you

While angel investors for online startups are a hot topic today, angel investors have actually been key to economic development for much longer, and for all types of industries. In fact, without angel investors, few companies would make it past the startup stage and to the venture capital investment stage, let alone private equity or IPO funding. Companies that found early funding through angel investors include Home Depot, Microsoft, Amazon, and Best Buy.Although individual angel investments are far smaller than venture capital investments, angel investments overall contribute similar amounts to the economy as do venture capitalists. And the importance of startups to the economy can’t be overstated: Startup companies are key to job creation. Angel investors do more than just provide cash. They are typically business experienced business professionals and entrepreneurs and also mentor a start up, serve as board members or executives help develop relationships with venture capital firms and more.

Today, angel investment has become a trend in the arena of individual investing; and angel groups and networks have formed to take a professional approach to startup investment.In an angel network, members work as a team in screening deals, valuating firms, and due diligence (research, reporting, firm assessments). However, compared with individual investors, they are typically much slower to act, requiring more time to manage the investment process.

1. What types of people are angel investors, and how are they different from venture capitalists?

2. Explain Angel math and the 10X formula

3. Why is it recommended that a startup exhaust all other forms of investment before turning to angel investors?

Answer 1

1. What types of people are angel investors, and how are they different from venture capitalists?

Answer: The angel investors are high net worth individuals or group of high net worth individuals who invest in early-age startups, ideas, products, etc. Their investment might be limited to few thousand dollars. They have very or limited responsibilities towards the due diligence and proving the experienced advice and networking opportunities for future funds. However, the venture capitalists are representatives of the Venture Capital firms and invest more into the developed products or late stage startups with a proven record of success which has limited risks and their investment can be more than a million dollars. They are responsible of partners invested money into the right direction, provide proper environment, guidance and consulting to the business invested by the venture capitalists.

2. Explain Angel math and the 10X formula.

Answer: The angel math is basically the approach used by the Angel investors in investing their money to the different start-ups of small businesses. Their core values lie into the belief that not all business will succeed and give returns but out of all the invested business, only a few of them will succeed and will generate the revenues to cope up with the cost of the other loss-making investment and eventually earn profit out of it.

The 10X formula is out of the 10 companies in which Angel investors have invested their money, the 3-4 business will not generate any returns for long duration of time. Another 3-4 business might generate small or medium returns on their investments. But out of that 10 business, 1 or 2 business will generate enough returns to cover all the investment costs and provide healthy profits for the angel investors.

3. Why is it recommended that a startup exhaust all other forms of investment before turning to angel investors?

Answer: It is important to understand that nobody will invest their money into a business without expecting something in return. The angel investors might help you at a very early stage of business startup, but they expect a healthy return and equity shares of your firm. Before asking the money for investment, it is better to use all other investments as the risk will be limited to yourself. In the case when other parties are involved as in case of angel investors, it becomes difficult to return their money and or provide them part of the control of business. The angel investment is not entitled for any due-deligence and might or might not provide mentorship and guidance for your business. The investment by angel investors are limited to a few thousand dollars only and might not be sufficient enough for the business requirement at a later developed stage of the business. Already having exhausted the angle investors investments it might become difficult to arrange more for the business.

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