Angel investing differs significantly from other forms of investment in that business angels usually endeavour to actively influence the success of their investment (compare stock market investing). The investment may be in a form other than money In fact, according to studies, substantially better results are achieved in a company by investing in sweat equity and network equity rather than simply private equity.

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Mentoring and contacts are frequently far more important to a company than money. Target companies list strategic planning, internationalisation of the company, acquisition of business contacts and procurement of additional funding as their most important sweat equity needs.

When considering an investment decision, the business angel considers the following: sweat equity that can be provided; available networks for potential customers or partners and amount of capital needed for the investment to succeed. In short, one could say that one third of angel investing consists of monetary investment, one third of utilisation of networks and one third of making the investor’s sweat equity available to the growth company in question. The role of an angel in a target company is determined by the investment portfolio situation and the investment strategy.

There is no standard, universal way of making a investment decision; instead every investor acts according to his or her own principles. The more an investor invests sweat equity and network equity, the more active and committed is the role he or she takes and the more he or she can influence the success of his or her investment. At their most active, investors may be in touch with the several times a week and at their most passive only a few times a year. Angels typically invest in different companies in different ways: in a passive role in one and in an active role in another. Business angels invest their own personal wealth and their “do not have to invest” attitude, which means that the entrepreneur’s personal chemistry and possibility to influence something are regarded as important increase in significance.

Angel investing is always temporary and can last only for a specific stage in the company’s lifecycle. The target duration for investments is approximately five years, but investors can be involved for as long as 10 years.

Angels frequently seek investments which are close to their knowledge and contact networks, also in terms of geographical location. Few angels invest in companies located further than 200 km from them, other than through syndicates. Increasingly, however, business angels are investing in global syndicates. In such a case, the closest angel usually takes care of the investment and represents the investor group.

Why do the investors seek an 80% annual increase in value?

Investors decide to invest only in good companies. In reality, however, only one in ten investments are successful, four in ten yield a return on the capital invested and with respect to the rest, everything is lost.

If an investor’s annual target rate of return for a portfolio is 20%, the estimated duration of the investment five years and the probability of success 10%, a single investment must produce an annual return of 80% to enable the investor to have the resources to make new investment decisions in the future, too. In other words the expected return on investment (EROI) must be 20-fold at the time of the decision.

Business angels are usually motivated by factors other than money. Underlying reasons may be a desire to influence global development (impact investment) or a wish to help their community. Other motivation factors may be, among others, a desire to stay at the forefront of development and a need for variation. Even though the primary motivational factors are other than money-related, a high return expectation also encourages investment. Money is a fuel without which investments cannot continue.