Angel investors are very important part of capital raising strategy to consider in Canada and the United States; there are different types of angel investors in these markets.
At some point in the life of every successful business, there comes a time when it becomes especially hard to get the capital necessary to maintain growth and profitability. It’s when the business is too large for the relatively small investments of family and friends to make much difference any longer, but too small to attract the interest of venture capitalists or investment banks ‘” or even commercial banks, for that matter. When this time comes, it may sometimes seem like the only thing that can save the business is an angel sent from heaven.
Actually, angels do exist, but they aren’t sent from heaven. These angels are actually angel investors, and they have saved many businesses from failure by providing them with the capital they needed just when they needed it. An angel investor is a high-net-worth individual who’s willing to make a private equity investment in an emerging-growth company. An angel is not necessarily a professional investor. He or she may be dealing with inherited money, capital acquired in real estate or oil, excess cash from a high-tech IPO, or funds from a number of other sources.
The only qualifications for being an angel are the following:
- Possession of sufficient capital. Although no strict definition of sufficient capital exists, the price of admission is certainly more than a few hundred or a few thousand dollars. A minimum of $10,000 in cash available for investments may not be far off the mark.
- The willingness to devote ‘” or, actually, to wager ‘” a portion of personal capital to high-risk, potentially high-reward investments. For every investment opportunity that makes investors rich, there are many more that fail to break even.
- “Accredited” status. Accredited status means that the angel is wealthy enough (in terms of assets and/or income) to absorb the high risk of investing in illiquid equity securities (securities that cannot be readily bought and sold on the open market). Regulation D put into effect by the Securities & Exchange Commission sets out the accredited investor test, (presumably to protect the public from falling into traps by investing in securities that are riskier than the investor’s apparent ability to absorb such financial risks would suggest. Roughly speaking, accredited investors must meet the following criteria:
- Minimum net worth (with spouse) of $1 million
- Minimum income of $200,000 a year ($300,000 for a married couple) for the preceding two years, coupled with an expectation to match that income in the current year
Although individuals have always invested in emerging-growth companies, the rise of angel investing in the last decade or so has been remarkable and has given an enormous boost to the amount of capital available to businesses in the United States. According to the Small Business Administration, more than 250,000 active angel investors in the U.S. are investing at least $20 billion in more than 30,000 small companies each year. That’s a lot of money going to a lot of businesses.