Identify a true statement about angel investors.
a) They are wealthy companies that invest in start-up businesses with high growth potential.
b) They look for companies that seem likely to grow at 5% to 10% per year.
c) They invest in promising start-up companies because they want to make money for themselves.
d) They invest in start-up businesses without requiring a share of ownership.
The Correct Answer and Explanation is:
Correct Answer: c) They invest in promising start-up companies because they want to make money for themselves.
Explanation:
Angel investors are individuals who provide capital to early-stage or start-up companies in exchange for equity (ownership) or convertible debt. These investors are typically wealthy individuals—often entrepreneurs themselves—who are willing to take on higher risks than traditional lenders or venture capitalists because they see the potential for high returns on their investments.
Let’s break down why option C is correct:
- Angel investors are primarily motivated by the possibility of high returns. While some may have a philanthropic interest in supporting entrepreneurship or innovation, the main goal is typically financial gain.
- These individuals often invest in the early stages of a business, when it is hardest to secure funding. Traditional banks usually won’t finance such risky ventures, and venture capital firms may only come in later once the company has demonstrated some traction.
- Because the businesses are in early stages and carry significant risk, angel investors usually require equity in the company—meaning they get a percentage of ownership in return for their money.
Now let’s review the other answer choices:
- a) They are wealthy companies…: This is false because angel investors are individuals, not companies.
- b) They look for companies that seem likely to grow at 5% to 10% per year: This is misleading because angel investors typically look for high-growth potential startups, often expecting returns that exceed 30% or more per year due to the high level of risk.
- d) They invest… without requiring a share of ownership: This is incorrect; angel investors typically do require equity or at least some form of convertible debt, which can later turn into ownership.
In summary, the key motivation for angel investors is financial profit, which aligns with option C. They take risks on start-ups in hopes that their early investment will yield a substantial return if the company succeeds.