Angel investors make it happen
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.
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.