When it comes to funding new small businesses, many have considered getting funded by angel investors. Angel investors are smaller private investors compared to the venture capitalist. However, many do not understand how it works with the angel investors. Here are the truths most business owners do not know them.
- Angel investors make money on exits
Angel investors make money on growth, not profits.
A lot of business owners and aspiring entrepreneurs thought that angel investors get their returns through the profits the business will generate. However, the truth is investors own business shares, but not revenues or profits. Angel investors make money from selling their ownership once they get the chance to exit. Unfortunately, some investors do not even see an exit in some startups or small businesses.
- Angel investors can earn more with business growth than with profits.
There are times when a business grows but loses money when the total profit is finally calculated. A business may lose money but it is growing when it comes to revenues, users, subscribers, and other factors.
Angel investors are more interested in company growth because it meanest ha valuation of the company is increasing. In the end, once they exit, the value of the business shares have already increased and thus, that’s when they will earn their money from their investments.
- Angel investors like to see your business figures but will not always believe it.
Angel investors may ask for your market estimates, share potential, costs, and sales, but they are not necessarily just interested in those figures. Most of the times, they just want to have insights on what you are thinking and how well you know your business and industry. Do you really understand the drivers, fixed costs, cash flow problems and the rest?
- Angel investors look out for the big bonanza.
Another truth about angel investors is that they know most startups fail. And they are also not risk-averse. In fact, they are more adventurous since they are interested in the big win, not the small profits.
- Angel investors that good businesses can also be bad investments.
Though there may be growth in the business, certain business founders may not exit soon enough. This may cause other angel investors not to see any possible exit at all.