Angel investing as well as any other early stage investing is extremely risky. In fact, the vast majority of angel investments don’t pay “dividends” and are complete failures. So why would an angel investor invest in a business? The following are four of the top reasons why an angel investors would take such risks.
Solid Return on Investments
Much like with options (there are many differences, however), due to the volatility of early stage ventures, the down side of angel investment is limited to the money invested, but the upside of a potential success is limitless if the angel investor is given an equity share. If a company they invest in makes it big they can earn many times their original investment and they can then overlook their other failures.
Business & Personal Relationships
Many times entrepreneurs, especially serial entrepreneurs have business associates that know their track records and are supportive of their colleagues and their ideas. Family and friends also provide investment because there is a high level of trust between people who have been acquainted for a long time. They know how you manage things such as projects and businesses and will most likely know whether funding you is a good risk to undertake.
Many angel investors are proficient businesspeople who believe that their skill sets will help the investee in their business. If they feel that their skills are the missing ingredient in your venture’s success, they are more willing to invest their financial and human capital. Human Capital and experience is great, because great ideas need great people to flourish. Do not think of it as intervention, but rather assistance.
Risk & Reward
The first day of corporate finance class, they teach you that higher risk must yield higher rewards. Many angel investors simply love the risk of the angel investment game. They know that the investments they are making are risky, but the potential upside is too much of a lure for them to reject.
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