Introduction to Angel Investing for Kids and Teens
This video explains the concept of angel investing in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about angel investors, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is angel investing
- Why would a company use angel investing: Advantages / pros
- Disadvantages / cons of Angel Investing
What is angel investing?
Angel investing is a type of investing where money is provided by high net worth individuals to start-ups, small business ventures, or entrepreneurs in exchange for equity.
These investors, called angel investors, invest in businesses that are in their very early stages or startup phase.
These businesses are usually very high risk, but also demonstrate potential for exponential growth, which is a huge incentive for the angel investors.
While generally angel investing refers to monetary investment, sometimes it can be in the form of managerial or technical expertise.
Why would a company use angel investing? What are the advantages?
Companies typically raise money from the stock market or borrow from banks. But both these options require the companies to have significant operating history.
Startups and small businesses that lack a proven track record do not have access to these sources. So angel investing becomes an essential source of financing for these businesses to get started.
Angel investors, many of whom are successful entrepreneurs themselves, have a lot of expertise in running businesses, which can be a source of invaluable guidance. They also have ready access to resources in key areas like legal and taxation, and are very well connected in the industry – all of which are incredibly crucial to a company’s rapid growth.
One very attractive benefit is that there is no obligation to repay the angel investor if the business fails – this is unlike borrowing from a bank, where the business has to pay back the loan even if it fails.
Another huge advantage of angel investing is that it encourages entrepreneurs by giving them an opportunity to bring their ideas to fruition. This promotes invention and innovation, creates jobs, and provides consumers with newer and better products and services.
Are there any disadvantages?
Angel investing is a high cost capital for companies – angel investors expect a higher equity stake to compensate for the higher risk of investing in a new company, sometimes up to 50%.
So depending on the size of capital, the ownership stake could be considerably reduced for the company founders. This could also translate into loss of control in decision making.
Angel investors may also expect a sizable return on their investment – as high as 10 times their original investment within the first 5-7 years. If the business is not able to grow at such a high rate, it can lead to a lot of pressure on the company’s management.
Angel investors are heavily involved in the running of the business – they want to have a say in the decision making even if they don’t own a majority stake.
Sometimes they lose patience and look to recoup their investment quickly, either by selling their stake or forcing a premature listing of the company, leaving the founders at a huge disadvantage.
Do you know of any companies that have used angel investing? Or know of any angel investors?
Please let us know through the comments below!