If you’re new to start-up funding, chances are you’ve wondered what an angel investor is. So, to help you make sense of angel investment and what’s involved in this type of small business funding, here’s a rundown of how angel investors work.

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What is an angel investor?

An angel investor is an investor who helps to fund start-ups. They’re individuals who look for promising small businesses that need a little financial help to get off the ground.

What do angel investors get in return? Normally, they want a minority share in the business in exchange for their initial investment. If the small business grows, the shares increase in value, which is how an angel investor makes their money.

What does an angel investor do?

Angel investors are normally fairly proactive. They’re usually wealthy and successful individuals who want to share their experience and knowledge with new entrepreneurs. The kind of help they might offer you includes:

• Introducing you to new business and social connections
• Mentoring you as you handle typical start-up challenges
• Advising you on product design and marketing based on their own industry experience

Every angel investor is a little different, but they all have one thing in common – they want the business to succeed.

What are the pros of angel investment?

Angel investment has some distinct advantages over other types of startup funding – here’s a summary.

• You will benefit from the angel’s expertise and industry knowledge.
• Since the money is not a loan, you’re not obliged to pay it back.
• Angels are often okay with some level of risk, so they’re comfortable taking on start-ups at the earliest funding stages. This could be the lifeline you need to actually get your business going.

Are there any downsides to angel investors?

All that said, there are some drawbacks to choosing angel investment.

• Bringing in an angel investor means giving up some control of your business.
• Since angels expect shares in your company, they’re entitled to a percentage of your future income.
• Angel investors usually expect you to have an exit strategy in place so they can realise their investment in a few years. This might not work for you if you plan on owning the business for many years to come.

How do I get angel investment?

So, if you think this is the approach for you, how do you go about finding an angel investor? Well, there are a few places you can look:

• Check out the UK Business Angels Association, which is an official trade body for angel investing. It has a large network of registered angels, so it’s a good place to start.
• If you have any professional contacts, ask around to see if they know of any angels you can pitch to.
• Attend industry events, whether virtually or in person. There’s always the chance you’ll meet an angel looking to invest.
• You might also look at specialist brokerage firms that can help connect you with angel investors in your industry.

While you’re looking for an angel, be sure to work on your elevator pitch and business plan. You’ll need these to impress any potential investor.

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Is an angel investor right for me?

For a startup, an angel investor can be a lifeline. However, angel investment isn’t right for every business, and depending on your long-term goals, other sources of business funding might be better.

And remember, even if you settle on angel investment, you don’t need to sign up with the first angel you encounter. Always do your research and suss out whether the investor is a good fit for your business before signing a contract.

Are you looking for a credit card to go along with your new business? Here’s a look at some business credit cards you might want to check out.

The post What is an angel investor? appeared first on The Motley Fool UK.

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