What Are Business Angels | Advantages And Disadvantages Of Business Angels – Absolute Guide

August 1, 2021 Angel Investing Education No Comments

What are business angels in the stock market?

Stock market angels are the trading influences that bring money or stock to companies whose stocks are going up.

What Are Business Angels

Business angels are different from stock market traders who are looking to make fast profits from the share market. The business angels are the people that help you make the right decisions with your money.

When you ask the question, What Are Business Angels, They provide you with information about companies and their stocks that could turn out to be profitable. They are not so interested in making profits but in making you aware of potential risks associated with certain stocks.

They are experts in forecasting the market and the direction of share prices.

Who Should Be A Business Angels

A common misconception on What Are Business Angels is that stock market angels are the pros that invest your money and make you make money. They are not that type of trader. However, they make you aware of different aspects of the stock market and help you to be on the right side of the market.

In return, you make them rich in returns.

Professionals In The Field Of Business

For example, again what are business angels, if you pick a certain company and make a decision that it will go up in the market, the business angel will let you know about that company. They are professionals in the field of business. They make decisions based on the requirements of their clients.

Their mission is to make their client happy.

In return, they earn the trust of their clients, thus gaining the ability to call their clients their “friends“. A company may not even admit their client into the company. They call their clients their friends because they bring prestige.

These stock market angels on the other hand also have a stockbroker who helps them in booking profits. Their role in trading is not over once they are gone.

Making The Right Decision

They continue to assist the trader in making the right decision. But, their role is not to play a guide in what to invest in and whatnot. Their role is to facilitate ease of getting in and out of the exchange.

You have a stockbroker, who helps you invest in the shares of companies that are profitable enough to give you good returns.

What is a business angel in business vs venture capital?

What are business angels, a professional that invests in companies or funds that are new or have a small market share. They usually invest for a limited duration of time and do not undertake any risks in the investment.

They typically do not invest more than 10% of the company's value and will not use more than 10% of the company's capital for the investment.

This is in contrast to venture capitalists, who undertake substantial risks with their investments and generally invest more than 10% of the company's value.

What is venture capital?

Venture capital firms are a type of business angels that are comprised of experienced professionals that undertake investments for corporations or funds that have a small market share or that have a new business model.

They undertake these investments with a 10% Rule and they undertake extensive due diligence on the company and their business model so that they can manage the risk and achieve a satisfactory outcome for the client.

Generally, venture capital firms do not undertake substantial due diligence on the company.

Do I need both?

To ensure that I have the right resources, it is necessary to have both a venture capital firm and a business angel in business as it helps ensure that I have the right professionals that are experienced and skilled to handle the risk and the outcomes of my investments.

Generally, I prefer to choose either the venture capital firm or the business angel if I am a first-time investor. Do I need both?

I am not a professional and I cannot afford both venture and business angels.

As I have already explained, I use my own capital for the investments that require a substantial amount of risk and for my own business needs, so I only use 10% of my share capital for the venture capital deals.

I do not need both, and I prefer to take the risk by myself, so I only use 10% of my share capital for both types of angels.

Now, when and how do I choose my venture capital firm?

Once I have chosen my company, I need to contact them for the details of my investment. I need to know the amount that I am willing to put into my investment and the number of shares I want to invest. They need to quote me a price that I can afford for my company and I can afford the price quoted by them.

Generally, I am quoting them the number of shares that I want to buy and they quote me the price that I can afford.

How do I choose my business angel?

I usually ask my friend, colleague or neighbour to introduce me to their business angel.

I am looking for an individual with a demonstrated track record and a proven ability to manage risk on my behalf.

Sometimes I am guided by the need to have someone to share our company growth with, and sometimes I am guided by the need to have someone to share our company profits with.

What are business angels, It really does not matter what leads me to seek out a business angel,

just make sure that you are guided by a clear and defined purpose, a good team, and a track record of successful deals before you make the deal!

What do business angels get in return

Answer: money, money is what we all want, money is what is required for the growth of an organization and of industry.

And it's quite evident that a lot of business investors need the help of a business angel to find a good business to invest in. Money and luck go hand in hand and sometimes these two can be the enemy of each other.

Let's examine the reason for the low rate of exit ratios:

1. Bad Case Study

Again when you want to question what are business angels, The investor creates a case study of a company that was very good, and the success of the organization grew much faster than the exit ratio. And it's true that the exit multiple is usually lower than the multiple for the company and for the industry.

But there is nothing wrong with that! What's wrong with that is when the good returns are higher than the exit multiple and then the company starts to decrease.

2. Confusion

Let's say you have invested in the best business angel. The returns have been much higher than the expected returns and then a year later you find that you are not prepared for the expected rates of growth of your investments.

And this confusion can lead to losses.

3. Bad timing

Many investors make bad decisions based on bad timing. The good investment goes up the stairs, the bad exit ratio happens.

An exit multiple is a good measurement tool to evaluate a business prospectus. It can help investors to find the best business to invest in.

Exit multiple helps investors to do proper research of the company, it helps them to compare the returns of different companies in the industry, and in many cases, it helps them to select the best business to invest in.

This exit multiple is also important for the research process of the business. All it does is measure the returns of the investment on the stock market. A multiple is a ratio that measures the performance of the stock of the company.

With that data, you can measure the profit of the company and compare it with other companies in the same industry. You can also measure the risk of the company with that data and compare it to other companies in the same industry.

By doing that you can easily understand the company's management team, their management style, their investment philosophy and much more.

4. Uncertainty

As said above exit multiple is very important in finding the best business to invest in. Yet even if the exits are perfect, and the multiple is high. Investors must stay in the trade longer so that the multiple will not drop so quickly.

Another important factor is uncertainty. In investing you face the risk of losing your whole investment. It is almost impossible to predict when the market will recover.

In this kind of investment where you have a higher chance of losing your whole investment, you must sit in the trade longer to achieve a higher multiple.

This is not possible if the market will recover soon. For this, you must have a high multiple to face the risk of losing your whole investment.

The exit method described above is just the starting point to find the best company to invest in. You must compare the stocks in the market, compare their ratios and compare them with other companies.

If you have many good stocks to compare, you can select one with a higher multiple for investment. Or you can select a company with a good ratio for comparison.

You can also compare the stocks of different companies to find their future prospects. This is very important and can help you choose the best company to invest in.

By making the right choice in the company, you can enjoy a safer future investment. With the proper analysis and with long practice you can even earn high multiple.

What are the advantages and disadvantages of business angels

In order to understand better the advantages and disadvantages of angel funding, we need to understand what angel investing is.

According to the Securities and Exchange Commission, angel investing is a method of investing in the shares of micro-cap companies.

But in simpler terms, it is an approach of investing in the shares of a company that are under the scope of raising a substantial amount of money to expand and grow the business.

The micro-cap companies are small companies by size and also have very low market capitalization value. Venture capital firms and angel investors usually play a very major role in deciding the fate of a particular venture.

This is because these companies are usually new or they are still working on the perfecting of the business concepts, and hence they need a very substantial amount of money to grow. So this is a good investment but with the agreed risks.

So as the investor you will be paid a percentage of the profit of the company.

There are many advantages of angel investing in micro-cap companies. These companies are usually run by entrepreneurs who have a keen sense of observation and can work wonders in the business.

A Corporation Or A Company

Most of these companies are either privately owned or a Corporation or a Company. So the investor gets direct entry into the core business of the company without any middleman. Another major advantage is that you don't have to put in your own money.

You don't have to share your money with the manager of the company. This is a major advantage especially for the people who do not have much money to invest.

Also, these companies are usually very flexible in providing the funds needed.

Another advantage is that the company is quite small, so there are fewer managers which increases the chance of success of the company.

A company is usually owned by the founder of the manager. A company is very much owned by the people who have invested. So a person can have a huge investment without any conflict.

There is no big company that have 100% of the shares. They have 50% of the shares. So there are a lot of advantages of angel investing in micro-cap companies.

Another advantage is that it is very easy to invest in these companies.

A person has to invest just 25$ per share. So even a person with $1000 can invest in a micro-cap company.

This reduces the risk of investment.

It is a very good way to start off your investment business. These companies have a way of developing and bring up the next big stars of the industry. These companies can bring up the next Steve Jobs.

They can bring up the next Bill Gates. You just need to find the right one.

Micro-Cap Companies

To find the right company you need to do some research. You need to know how micro-cap companies are run and understand how the company is made money is made.

One of the ways is through equity investment. The company is owned by people who invest on behalf of the company. Another is through debt investment. Sometimes the company is not using its funds properly.

System To Generate Revenue

So you need to check the accounts and find out why the funds were not used properly. The company needs to have a good system to generate revenue. For this, you need to find out what products are being sold and analyze if it's profitable.

If the products are profitable then they can raise more funds through equity investment. So angel investing is a very good way to start your business.

If you are into the retail business then online stock trading is the next way to go. You can find and sell stocks with just a laptop and a money market account.

Which is the role of business angel

Which is the role of a business angel who invests their money in the initial phase of startups? One of the most popular business angel models is angel investors.

These angels are investors who seek to invest in startups or companies before they make it big.

They have large amounts of money to invest and they look to invest in fledgling companies that still have lots of growth potential.

Several Factors To Consider

To understand what investors look for when they seek to invest in companies, let's look at the model of a typical angel. An angel looks at a particular startup or business opportunity and finds several factors to consider when determining if this is the right business to invest in.

First, the angel looks at a company's plans for growth, what business plans the company has for marketing, their relationships with their banks, relationships with their suppliers and their reputation.

The angel looks at all these things when determining if the business is set up properly and ready to expand.

Next, the angel looks at the current financial situation of the company. The angel is looking to see how stable the company is financially and how much debt they have on their books.

Finally, the angel looks at the management team for the company and sees if they have enough experience and knowledge.

From these factors, the angel makes a determination of the right startup to invest in.

Growth Potential

Since the angel wants to invest in startups that have lots of growth potential, they are looking for startups that have a significant amount of funding already committed to them.

Angels usually look for startups that have no debt, lots of funding and a leadership team that has tons of experience and success under their belts.

Now, that we understand the angel's model, we can examine how the angel behaves when they find the right startup or company.

Angels act very cautiously initially, looking to see how stable the company is financially and how much debt they have on their books.

If the startup or company has no debt, they may not be actively raising money, but they still have lots of room to grow.

If the company has no debt but is struggling to stay afloat, it may be struggling to keep investors happy and at the moment are not the ideal startup to invest in.

Long Term Growth

Finally, if the startup or company has lots of debt, but has a leadership team that has tons of experience and success under their belt, the angel may assume they have a shot at long term growth and they jump on the company.

But, always remember that angels only want to invest in companies that have growth potential.

So, these are the three basic business models angels use when they seek to invest in companies, but how does a company know if they are an angel or an investor?

1. Is the CEO of the company a billionaire?

I don't care what company you are investing in, but the CEO should be a billionaire or close to it. Billionaires are very influential and they are very different from angels. A billionaire can take his money and do some serious shopping.

Plus, they are not afraid to take their money and use it. Also, a company needs to have a certain amount of cash on hand to invest in a company that is worth investing in.

2. Look at the company's balance sheet

Make sure that they have cash, cash equivalents, and short term investments.

2.1 Is the company profitable?

This is the most important question.

Make sure the company is earning a positive Income Statement. Even if a company is making money, a positive Income Statement is still important because it shows that the company is making money.

What's more, if a company is making money, it can only grow. This is because it shows that the company is ready to expand.

3. Make sure the company has a lot of cash on hand.

Even if a company is making money, this income can still be invested. Also, make sure the company is investing in its future.

4. Get a quick overview of the company by looking at its balance sheet.

Even if the company's earnings are positive, the balance sheet can still be misleading.

5. Make sure the company has a low debt ratio.

Low debt means that the company has less debt and so can invest its cash. Plus, a company with no debt to total capital ratio can easily grow.

6. Look at the dividend yield.

Dividend yield can be a positive for a company that is trading above its growth rate. However, if the dividend yield is very close to the growth rate, then there may be something fishy going on.

If you followed these steps, then you already know what questions to ask.

Not Yet Listed

As you gain more knowledge about the workings of the stock exchange, you can also invest in some companies that are not yet listed on the stock exchange. Doing this is considered by many an experienced broker to be the riskiest and risky thing a broker can do.

But, it is also believed to be the safest.

For example, you do not even need to go to the stock exchange to invest in the shares of a company. You can easily make decisions based on the information you find on the net and the experience you have in online stock trading.

The advantage is that you will not lose your money.

Sell Your Shares At A Low Price

Another example, if the company starts to lose money, you can easily sell your shares at a low price and make the money back. You do not need to keep your money tied up while the company plods towards bankruptcy.

So, the broker will keep advising you on what to put in what to sell and what to buy, but you will keep deciding based on your own experience. This is very rewarding but also very taxing. It is a good decision for experienced traders but it is not a good decision for first-timers.

The only exception to that is when you are new to the stock market, you can take risks and invest in an unknown company that is also under the radar of the experts.

Lots Of Debt

However, do not invest in companies with lots of debt. This is a sure way to lose a lot of money and if you do that, you will have to start all over again.

Do not forget that if you invest your money in these unknown companies, you are making money. For that reason, you need to stick to some basic rules.

Well-Established Companies

First, only invest in companies that are well established. If the company is not well established, do not worry. You will lose money investing in it. Invest in well-established companies. Second, only invest in companies that have a sound business plan.

These can be verified by checking their balance sheets and profit and loss statements. Third, do not invest in a company whose stocks are trading at a low price.

As you are investing in their stock, you are also sharing in the profit they generate.

If you do that, you will have to buy the stock at a low price and sell at a high price. So, always remember, as you buy and sell, you are sharing in the profit of the company.

Fourth, do not make an investment just because the stock is cheap. Check the fundamentals.

Always remember that it is just like taking risks.

You do not know whether you will gain money or incur losses. But you know that you will make a loss if you go into a stock without doing some research on the company and its history.

So, never invest just because the stock is cheap. Always invest with solid reasoning. I hope you found this post useful in your research in what are business angels and you find the information on what are business angels that you are looking for, Below you will find my other posts related to angel investing.