High-Impact Entrepreneurship

After all, what is an angel investor?

Reprinted from Endeavor Brazil’s Endeavor Mag. See original post here.

By Cássio Spina

Translated by Jack Connor

The term Angel Investor, or Business Angel, was coined in the U.S. in the early twentieth century to describe investors who bankrolled the production costs of Broadway plays, taking risks and providing implementation assistance in order to take part in the financial rewards. The concept evolved into investments made by individuals, usually professionals or successful entrepreneurs in start-ups, providing not only financial capital but also intellectual support for an entrepreneur through their experience and knowledge. This is how it ended up being known as Smart Money.

For their investment, the Angel-Investor receives a minority equity share and has no executive position in the company, rather acting as an advisor guiding entrepreneurs and participating in strategic decisions, greatly increasing their chances of success as well as accelerating development.

The angel investment in a company is usually done by a group 2-5 investors, both for dilution risk as well as to share the commitment. It is worth noting that the current trend for performing the most efficient angel investment is by designating an investor-leader (Lead Investor or, sometimes just as a Deal Leader) that makes the pre-project evaluation and negotiates with the entrepreneur, which is then presented to other angel investors (in this case called followers). With this investment method the process is faster and more effective, as accomplishing the whole process as a group can be exorbitantly slow, since it can be a challenge to reconcile investors’ schedules for even a simple meeting, not to mention that consensus can take months to reach.

Of course, the lead investor must receive additional compensation for his added dedication, not necessarily in money, but by having a different percentage share of the business, as they must make more time available to accomplish this whole investment process. Nothing prevents a single angel investor from acting as a business leader for one company and a follower for another, it actually allows them to increase productivity and opportunities. On the other hand, if the main activity of the angel investor is with another company, and they have little willingness to engage in the entire investment process, it is recommended that they become a follower.

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