When entrepreneurs realize they need funding for their ventures, most think about 1) individual or “angel” investors and 2) venture capital.
When assessing the two types of funding, it is important to note that angel funding is considerably easier to attain.
Consider these statistics:
In an average year (according to the Center for Venture Research at the University of New Hampshire), 250,000 angel investors will fund 60,000 companies, giving them $20 Billion in total.
Conversely, in and average year (according to the National Venture Capital Association), there are only 800 active venture capital firms, who fund only 4,000 companies, also giving them $20 Billion in total.
So while venture capitalists write much larger checks, 15 times more entrepreneurs raise funding from angels.
So why do angel investors fund entrepreneurs? The common answer is that they hope to get a solid return on their investment. Obviously, investing at the earliest stages for a company that eventually goes big can earn the investor 100X their money back or more.
However, there are three lesser known, but equally important reasons, why angel investors fund entrepreneurs:
1. They know, like and trust the entrepreneur. Like with friends and family investments, sometimes angels know and trust the entrepreneurs and want to help them succeed.
2. They feel they can add real value: many angels have lots of relevant experience that can help the companies they fund, from experience hiring staff to connections with key potential customers or suppliers. If angels can see their involvement adding a lot of value to the company, they might be very interested in investing.
3. Sometimes the angel wants or likes the action. Simply put, angel investing is exciting. It is generally a higher risk/higher reward version of the public stock markets requiring a more entrepreneurial analysis which is highly intriguing. This is particularly the case when the angel investor is a retired entrepreneur or executive.
So, if you are an entrepreneur seeking funding, keep these motivations top-of-mind when identifying, approaching and speaking with angels. As they can help you gain the funding you need to grow your venture.
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