An­gel in­vestors make it hap­pen

Enterprise - - 21 -

The lack of ac­cess to fund­ing busi­ness ideas is be­ing con­sid­ered as a ma­jor bar­rier to the emer­gence and growth of the new, young en­trepreneurs in Pak­istan. This is un­like any de­vel­oped economies, where ven­ture cap­i­tal, an­gel funds and in­vest­ment banks are ea­ger to in­vest in busi­ness ideas of young en­trepreneurs.

In Pak­istan, there are com­mer­cial banks that de­mand col­lat­eral or se­cu­rity if a prospec­tive en­tre­pre­neur wants to bor­row money from them. The chances of get­ting a loan are scarce as a re­sult of the in­abil­ity to mort­gage with banks. This lack of ac­cess to fund­ing faced by en­trepreneurs is termed as fi­nan­cial ex­clu­sion. This sit­u­a­tion ex­ists in spite of rapid ex­pan­sion in the fi­nan­cial sec­tor dur­ing the mid-2000s and steps taken by the cen­tral bank to re­move sup­ply side con­straints, ac­cord­ing to sev­eral re­ports re­leased by mul­ti­lat­eral agen­cies from time to time in the past three years. Most peo­ple can­not ac­cess the banks for funds un­less they have prop­erty to mort­gage with the banks.

In such cases ‘an­gel’ or ‘in­for­mal’ in­vestors play a ma­jor role. An­gels typ­i­cally in­vest their own funds, un­like ven­ture cap­i­tal­ists, who man­age the pooled money of oth­ers in a pro­fes­sion­al­ly­man­aged fund. Although typ­i­cally re­flect­ing the in­vest­ment judg­ment of an in­di­vid­ual, the ac­tual en­tity that pro­vides the fund­ing may be a trust, busi­ness, limited li­a­bil­ity com­pany, in­vest­ment fund, etc. The Har­vard Busi­ness Re­port reck­ons an­gel funded startup com­pa­nies as less likely to fail than com­pa­nies that rely on other forms of ini­tial fi­nanc­ing.

The fac­tors of wealth and en­trepreneur­ship dif­fer­en­ti­ate the small share of peo­ple who make in­for­mal in­vest­ments from those who do not. The odds of be­ing an in­for­mal in­vestor go up with a per­son’s in­come and net worth. In ad­di­tion, in­for­mal in­vestors are more likely than non­in­vestors to be­come en­trepreneurs them­selves.

An­gel in­vestors also tend to seek smaller deals and pre­fer to in­vest in risky, early-stage en­ter­prises, and in prac­ti­cally all in­dus­try sec­tors. In ad­di­tion, many de­sire a small amount of con­trol in their in­vested firms and tend to avoid fol­low-on in­vest­ments.

Ad­van­tages of an­gel in­vest­ing

Pro­vide needed cap­i­tal for startup

When en­trepreneurs have ex­hausted money from friends and fam­ily, per­sonal sav­ings, bank loans and credit cards for their star­tups, they may seek an­gel in­vestors to help them bridge their needed eq­uity gap. Ac­cord­ing to the Cen­ter for Ven­ture Re­search at the Univer­sity of New Hamp­shire,

nearly two-thirds of fund­ing for new en­ter­prises is ob­tained from an­gel in­vestors. There­fore, an­gel in­vestor cap­i­tal can pro­vide a great source of fund­ing for new busi­nesses that have a high po­ten­tial for growth.

Abil­ity to raise cap­i­tal in small amounts

Most early-stage ven­tures re­quire small amounts of money, typ­i­cally less than $500,000. An­gel in­vestors can pro­vide this needed amount us­ing their own per­sonal funds for the in­vest­ment. Ven­ture cap­i­tal­ists, on the other hand, typ­i­cally pool money from dif­fer­ent sources, gen­er­ally in­vest in lat­er­stage com­pa­nies that have al­ready es­tab­lished sta­bil­ity and suc­cess and in­vest in en­ter­prises in need of at least $500,000 to $1 mil­lion.

Flex­i­ble busi­ness agree­ments

An­gel in­vestors have more in­for­mal in­vest­ment cri­te­ria com­pared to the tra­di­tional fi­nan­cial lenders, in­clud­ing banks and ven­ture cap­i­tal­ists. Be­cause they are in­vest­ing their own money, their busi­ness deals can of­ten be ne­go­tiable. Based on this flex­i­bil­ity, they are more likely to be ex­cel­lent sources of cap­i­tal for early-stage busi­nesses.

Bring forth vast knowl­edge and ex­pe­ri­ence to a new com­pany

Since many an­gel in­vestors are en­trepreneurs them­selves, they pro­vide the needed cap­i­tal and also of­fer the de­sired sup­port, ex­per­tise and con­tacts in mak­ing a busi­ness grow.

Does not re­quire high monthly fees

An­other ben­e­fit of rais­ing an­gel cap­i­tal is that there are no out­stand­ing pay­ment rates such as the ones that bank loans and credit cards re­quire. Many en­trepreneurs en­joy this as­pect of an­gel in­vest­ment, con­cen­trat­ing their time and ef­fort on tak­ing their new busi­ness for­ward rather than wor­ry­ing about high monthly pay­ments and fees that tra­di­tional lenders en­force.

Com­mu­nity in­volve­ment

Many an­gel in­vestors choose to in­vest lo­cally. The cap­i­tal they pro­vide for a new busi­ness not only as­sists the launch of a new en­ter­prise but also cre­ates lo­cal em­ploy­ment op­por­tu­ni­ties and helps stim­u­late lo­cal eco­nomic growth by en­cour­ag­ing con­sumers to pur­chase their prod­ucts.

Lo­cated ev­ery­where, in prac­ti­cally all in­dus­tries

An­gel in­vestors can be found ev­ery­where, not just in tra­di­tional fi­nan­cial cen­tres and dis­tricts. They also in­vest in nearly all mar­ket sec­tors world­wide. A ma­jor­ity are in­volved in in­dus­tryspe­cific in­vest­ments in line with the level of their ex­per­tise. Sim­i­lar to ven­ture cap­i­tal­ists, along with other in­dus­tries, an­gel in­vestors are mainly prom­i­nent in the tech­nol­ogy sec­tor.

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