Angel investor: what is it, how does it work and how to get one?

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Angel investor: what is it, how does it work and how to get one?

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Brazil has more than 12,700 startups, according to the UK residents Startups Association (Abstartups), and the search for a angel investor it is the natural way to capitalize and optimize the chances of success in a highly competitive market. But, after all, what is an angel investor?

Roughly speaking, an angel investor is an individual who invests in startups with high growth and return potential, in the early stages of their development, with their own capital.

In addition to the amount invested, this type of investor also acts as a mentor, guiding business decisions through smart-money (experience, network of contacts, execution of activities, etc.).

If you want to know what are the main features that investors analyze in the startup market, we recommend reading the article “How do investors analyze startups to invest?”.

To deepen your knowledge about what an angel investor is and how this investment modality works, keep following the post.

We have separated the main information to help you get this strategic application and learn how to get an angel investor. Good reading!

What is a startup?

Briefly, Startup is a technology-based company that has:

  • rapid growth,
  • repeatable,
  • scalable,
  • it’s disruptive.

Although it is not limited to digital business, a startup needs constant innovation to avoid being considered a traditional company.

In other words, startup it is a business model with great potential for evolution and profitability.

Your profile innovative it allows it to offer brand new solutions or adaptations of less efficient references repeatedly and with scalability.

This means that she is able to deliver the same product in scale potentially unlimited and develop significantly without impacting the finances of the Business model On the same proportion.

In addition, these companies are inserted in uncertain markets, so they are quite flexible and adaptable to ensure their sustainability.

In Brazil, the most promising and profitable startups are:

  • iFood – internet food deliveries
  • 99 – passenger transport
  • Nubank – financial services
  • Pagseguro – financial services
  • Stonepayment methods
  • Ebanx – online payment methods
  • Wildlife – game developer
  • Gympass – gyms and corporate plans platform
  • Fifth Floor – Real Estate Rental
  • Loggi – logistics services
  • Arco Educação – educational solutions

To achieve operational quality, startups rely on several types of investment, and one of the most sought after is the angel investor.

What is an angel investor?

The term investor angel was created in the United States, at the beginning of the 20th century, to characterize the investors who production costs Broadway plays, taking the risks and participating in your financial return.

The concept of angel investor has matured and started to be used to designate experienced professionals or entrepreneurs who provide not only financial but also intellectual capital, supporting projects with:

  • your professional luggage,
  • networking,
  • specific knowledge, and so on.

For this reason, this support became known as Smart-Money.

Companies benefited by angel investors tend to be in the initial stage of development, operate with innovative technologies and have significant growth and revenue potential. That is, startups.

In exchange for this application, the angel investor receives a participation in the business society.

He does not assume an executive position in the company, but acts as a counselor or mentor, guiding entrepreneurs and participating in strategic decisions.

This professional, in general, has already had a successful career, accumulating reservation sufficient to allocate a small part (5% to 10% of its equity) in investments.

Their knowledge of the market and management are relevant, so this mentoring is capable of increase the company’s chances of success, as well as accelerating its development.

Angel investor: how does it work?

Angel investment is usually made by a group of 2 to 5 experts, both to share the risks and to share the dedication and work in the operation.

A lead investor (Lead Investor or Deal Leader if your investment is only for work) is chosen from among them to pre-evaluate the project and carry out the negotiations with the entrepreneur.

In this way, other investors (followers) can interact with the business in a more organized, fast and efficient way.

As we said earlier, in addition to the capital invested (cash in), these specialist investors provide time and smart money to optimize the business. And in return, they get a minority shareholding (from 5% to 40%) in the organization.

The goal is multiply the investment made, therefore, the focus is on add knowledge to the company and strengthen its commercial capacity. After all, the more the business solidifies, the more angel investors earn.

In Brazil, there are groups of investors that concentrate several angel investors, some of the most sought after are:

How to get an angel investor?

To attract the attention and interest of an angel investor, the company must have four essential requirements:

  • innovation,
  • scalability,
  • broad market,
  • engaged entrepreneur.

Understand the logic of how to get an angel investor, below, in detail.

Innovation

Innovation is what provides the potential business growth, so it is an indispensable factor to attract angel investors.

It is worth pointing out that innovation means doing something different or in a different way, and not exclusively creating something new.

Scalability

Scalability is also a decisive quality to get an angel investor, because it is a way to assure the angel investor that the company can grow without increasing expenses in the same proportion. And so, guarantee profitability.

Large market

Another important feature to get an angel investor is the company’s market profile. In other words, the breadth of your target audience, because growth is directly linked to demand for Marketplace.

Engaged entrepreneur

Finally, the fourth essential requirement for getting an angel investor for the business is to have an engaged entrepreneur.

The manager must be able to turn ideas into reality, he must be prepared to put the strategic plan into action with efficiency and confidence.

In other words, show that your human capital is extremely capable.

How is the angel investor market?

Potential is not lacking in Brazil, the volume of startups grows more and more and the investment opportunities are significant. However, compared to the international scenario, the country is still in its infancy.

According to a survey by Angels of Brazil, held in 2018, while the US reached the benchmark US $ 23 billion in this type of investment per year, Brazil invested just over £ 979 million. And considering the GDP value of both countries, this investment should be at least eight times higher in Brazil.

To stimulate this modality, a complementary law was created (Law No. 155/2016) that makes it impossible to consider the value applied by an angel investor as share capital or accounted for purposes of classification.

That is, the angel investor cannot be considered a partner and must not be held responsible for any debt owed by the company.

The law protects the angel investor in relation to possible liabilities that the company may have. Thus, this type of investment tends to increase, since investor safety is guaranteed.

According to a group survey GVAngels, the new coronavirus pandemic (COVID-19) should not impact this market in Brazil. 50% of the angel investors interviewed pointed out that the crisis did not affect their predisposition to invest in early stage startups, and another 10% say their interest in this asset class has increased.

Those that manage to get through the crisis, possibly, will be the next generation of advantageous exits. Therefore, the current scenario brings great opportunities for investors to bet on startups.

How to become an angel investor?

Unlike what many imagine, an angel investor is usually not among the richest people in the world.

He has the capital necessary to invest smartly and has strategic knowledge.

We are a family owned and operated business.This type of investment is usually made jointly and the capital applied varies from £ 50 thousand to £ 600 thousand, therefore each angel can start investing with values ​​around £ 20 thousand.

As this application involves the startup market, there is no ideal investment pattern. However, it is recommended that the angel do not commit more than 10% of your assets and that he has a portfolio of investments.

In other words, the angel investor must invest in more than one startup so that risk is reduced, the portfolio is expanded and the chances of return increased.

In addition, intellectual skills have a significant weight. The experience of an angel investor can often exceed the value of the capital invested, because this expertise helps the entrepreneur to avoid mistakes, saving time and capital.

The aggregate smart-money increases the startup’s chances of success and attracts new investors to the business. So to be an angel investor, in addition to capital, the professional must have great market knowledge and technical training.

Therefore, an angel investor aims to invest in businesses with a high potential return, which consequently will have a major positive impact on society through the generation of job and income opportunities.

Understanding what an angel investor is and looking for such a mentor is a way of:

  • enhance business development,
  • ensure more assertive decision making,
  • optimize market positioning,
  • reinforce organizational quality.

Did you like the article? So, share it on your social networks with friends who may also be interested in the subject!

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