Explain the characteristics of Angel investors.

Question

Accepted Answer

**Angel investors** are affluent individuals who provide capital for business start-ups and early-stage companies having a high-risk, high-return matrix, usually in exchange for convertible debt or ownership equity. The term 'angel' originally comes from Broadway, where it was used to describe wealthy individuals who provide money for theatrical productions.

The characteristics of Angel Investors are:

1. **High Net Worth Individuals:** Most angel investors are current or retired executives, business owners, or high net worth individuals who have the knowledge, expertise, and funds that help start-ups match up to industry standards. They were humorously given the acronym FFF — Friends, Family, and Fools.

2. **High Risk Bearing and Return Expectation:** As angel investors bear extremely high risk and are usually subject to dilution from future investment rounds, they expect a very high return on investment. They invest in ventures with high growth potential.

3. **Proactive Mentoring and Guidance:** Apart from investing funds, most angels provide proactive advice, guidance, industry connections, and mentoring to start-ups in their early days. They play a crucial role in shaping the direction of the venture.

4. **Value Creation Objective:** Their objective is to create great companies by providing value creation and simultaneously helping investors realize a high return on investments.

5. **Keen Interest in Current Developments:** They have a sharp inclination to keep abreast of current developments in a particular business arena, mentoring another generation of entrepreneurs by making use of their vast experience.

Angel investors fill the critical gap in start-up financing between "friends and family" and formal venture capitalists. Although it is usually difficult to raise more than a few thousands from friends and family, even the venture capitalists are least interested to make investments in very early stages. Thus, angel investment is a common second round of financing for high-growth start-ups or early-stage companies.