The angel investor is a very wealthy individual and interested in financing innovative business projects with high expected profits. Such initiatives, however, are also high risk.
The angel investor’s business model is to diversify , placing his fortune in various ventures. Thus, it is enough that only some of these new companies work to obtain benefits. As we know, the greater the risk of an investment, the greater the profitability required of that investment. Let’s imagine that we invest 100,000 euros in 5 different companies, spending a total of 500,000 euros. If 4 of the companies end up in bankruptcy but one of them we sell for 1,000,000 euros, our final investment will have been successful.
Angel Investor Features
Among the characteristics of the angel investor are:
- Seeks to be present in the entrepreneurship hubsto get in touch with innovative professionals who need financing for their startups . These companies are characterized by promising exponential growth if they prosper.
- They not only lend money, but get involved with the project they finance. In some cases, they offer their knowledge in business. Thus, they help in decision making and share their experiences and professional contacts.
- Not only assess the speed of return on investment, but the capacity and commitment of the entrepreneur.
- Unlike what happens with a venture capital fund, wealth management was not delegated to a third party. The angel investor manages his own money and decides where to place it.
- The capital contributed by an angel investor is usually paid with a stake in the startup.
- They are usually grouped into networks or clubs organized by public or private entities. For example, universities or study centers, higher.
- Angel investors are a secondary source of financing. They turn to entrepreneurs after knocking on the door to family, friends and professional contacts.
Angel investors are also known as sponsor investors or proximity investors.
Example of angel investor
An example of an angel investor is Peter Thiel, co-founder of PayPal, who also placed half a million dollars on Facebook in 2004.
In exchange for his contribution to the social network, Thiel received 10% of the company’s shares. This percentage was set by betting on the growth of the firm that at that time was worth less than US $ 5,000,000.
Subsequently, in 2007 Microsoft paid US $ 240 million for 1.6% of Facebook. That is, the company was being valued at US $ 15 billion.
Therefore, three years after financing, that 10% of the social network that was owned by Thiel was worth US $ 1.5 billion. This means the profitability of the operation for the angel investor was around 3,000%.