If you have not been successful in your efforts to secure funding for your latest business venture, an angel investor might be your answer. An angel investor specializes in offering financial backing for the small-business owner and entrepreneur within your startup stage and beyond. As the funds they bring to the table may make all the difference in whether your concept ever gets off the ground, there are a few trade-offs you must be alert to.
Pro: An Angel Investor is willing to take a Risk
Being eligible for a small-business loan typically entails hopping through a few hoops — challenges you might not be faced with while dealing with the angel investor. This is because these, "angels," are often established entrepreneurs themselves, who comprehend the level of involved risk and are at ease with taking it on. Even if the bank agrees to offering you the funds, they might restrict the quantity you’re able to borrow to curb the possibility for their loss. On the other hand, angel investors usually do not balk at making a bigger investment if they believe in the organization’s potential. An angel investor can usually, "smell," a good idea and a good deal.
Con: An Angel Investor Might Set the Bar Higher
The disadvantage of the angel investor’s higher tolerance for risk is that also they usually have higher expectations. They are in business to earn money, and as there is a significant quantity of funds on the line, they are going to want to witness a payoff, just like anyone else is. It isn’t unusual for an angel investor to expect a rate of return that equals 10 times their original investment inside the first 5 – 7 years. When you are being held to this type of standard, the pressure to generate may be intense. If you are considering angel investors, you must determine whether the startup is within a position to expand at the rate the investor expects.
Pro: Money is not a Loan
As you take out your small business loan, your bank will expect you to repay it, irrespective of whether the venture actually succeeds. An angel investor operates inside a different framework. They’ll offer you the capital needed to get the ball rolling, and in exchange, they receive an ownership stake in your company. If the startup takes off, you’ll both reap the financial rewards. If your company falls flat, on the other hand, an angel investor won’t expect you to pay back the offered funds.
Con: There will be Strings Attached
Though you aren’t officially obligated to pay back your investor the capital they offer, there is a catch. As you hand equity over in your business as a portion of the deal, you essentially are giving away a portion of your future net earnings. The percentage of ownership the angel investor requests usually depends on how much they are investing. If you expect the startup to be extremely successful, it might add up to lots of money you will not have the ability to lay claim to. As you have an offer on the table, carefully assess the terms to ensure the quantity of ownership the investor is asking for does not eat into your own capability of realizing a profit.
Pro: Odds of Success Rise
Angel investors typically bring years of expertise to the table of a start up and they already understand the ropes it’ll take to bring success to your starting a business. Scientists from the Harvard Business School discovered that ventures backed by angel investors are more likely to remain in business longer, have substantial growth, and witness a greater rate of return. If you are seeking guidance and advice in addition to funding, angel investors offer a plethora of precious knowledge.
Con: You Aren’t in Full Control
An angel investor won’t shell out the big bucks without taking an interest in how the funds are used. If you are expecting them to take a hands-off approach, you might be in for a rude awakening. It is more likely that the angel is going to want to take an active part in making decisions which affect your organization’s outcome. Even if they give you control, you will still be accountable for explaining the reasons behind some of your decisions. Prior to starting to look for your angel investor, you must ensure that you are at ease with permitting somebody who isn’t intimately familiar with you or your business to play a role in how it is run.
FAQs
Disadvantages of using angel investors
Relatively small funding amounts: As individual investors, business angels usually provide smaller sums of money than their institutional counterparts. Less structural support: Compared with institutional investors, business angels provide less structural support to your company.
What are the downsides of angel investors? ›
Disadvantages of using angel investors
Relatively small funding amounts: As individual investors, business angels usually provide smaller sums of money than their institutional counterparts. Less structural support: Compared with institutional investors, business angels provide less structural support to your company.
Why would an angel investor want to invest in a startup? ›
Above all, angel investors are looking for a high rate of return on their initial investment. They'll want to know if the business idea fills a gap in the market with potential for significant growth. The product or service should be new and exciting – so you'll need a heavy-hitting, detailed pitch to sell it.
Why are angel investors a better option for startup ventures than venture capitalists? ›
Founders typically find it easier to get angel investors on board than venture capital investors because angels are more prepared to invest in a company that may not bring a return. Because they take an early piece of the pie, and that grows over time, this can make the investment worthwhile.
What is a major advantage of getting funding from an angel investor? ›
The Advantages of Angel Investors
Having an angel investor means your business doesn't have to repay the funds because you're giving ownership shares in exchange for money. Angel investing is usually reserved for established businesses beyond the startup phase.
How much percentage do angel investors take? ›
What percentage do angel investors take? The percentage of ownership that angel investors typically take in a company can vary, but typically it is between 10-20%.
What is the con of angel investor? ›
Con: You're not in total control
Because angel investing comes with so many risks, some angel investors may want partial control over your company as well. Seasoned venture capitalists may see a great opportunity in your business but may also want more say in how things are operated.
What happens to angel investors if a startup fails? ›
If an angel investor has invested in a startup that fails, they will likely lose their investment. However, there are some things that angel investors can do to minimize their losses and increase their chances of success with future investments.
How do angel investors get paid back? ›
During an angel investment round, investors can purchase equity in the company, giving them a certain percentage of the ownership. This equity stake can then be cashed out at a later date when the company has increased in valuation, earning a profit for the investors.
What is the success rate of angel investing? ›
Angel Insights Blog
Over half of early-stage investments typically fail to return any capital, with the top 10% usually returning 85-90% of all the cash proceeds.
An angel investor is an individual who invests in startups usually in exchange for an agreed-upon percentage of ownership in the company. So, while by definition these Shark Tank hosts are, in fact, angel investors, they look and act differently than the angel investors who invest beyond the tank.
What are the advantages and disadvantages associated with angel investing? ›
Pros and Cons of Using an Angel Investor to Fund a Startup
- Pro: An Angel Investor is willing to take a Risk. ...
- Con: An Angel Investor Might Set the Bar Higher. ...
- Pro: Money is not a Loan. ...
- Con: There will be Strings Attached. ...
- Pro: Odds of Success Rise. ...
- Con: You Aren't in Full Control.
Angel investors are typically high net worth people who fund startups or early-stage businesses in exchange for stock or ownership in that company. This makes them a good source of funds for newer businesses that want to avoid taking out a small-business loan.
Why do startups need angel investors? ›
An angel investor provides initial seed money for startup businesses, usually in exchange for ownership equity in the company. The angel investor may be involved in a series of projects on a purely professional basis or may be found among an entrepreneur's family and friends.
Why an angel investor may want to help finance a new business? ›
Angel investors provide capital for a startup in its earliest stages, typically in exchange for equity in the organization. Angel investors can often provide support, expertise and mentorship, in addition to funds, for a business.
What return do angel investors expect? ›
While it varies depending on the individual investor, the average return for an angel investor is thought to be around 20%. Of course, there are always exceptions to this rule and some angel investors have made a lot more (or a lot less) money from their investments.
What are angel investors' advantages and disadvantages? ›
Pros and Cons of Using an Angel Investor to Fund a Startup
- Pro: An Angel Investor is willing to take a Risk. ...
- Con: An Angel Investor Might Set the Bar Higher. ...
- Pro: Money is not a Loan. ...
- Con: There will be Strings Attached. ...
- Pro: Odds of Success Rise. ...
- Con: You Aren't in Full Control.
One of the biggest risks is that the startup might fail. If this happens, you could lose all of the money you invested. Additionally, it can be difficult to find good angel investors, and there's always the chance that you could end up working with someone who isn't a good fit for your company.
What are the challenges faced by angel investors? ›
Limited control: Working with angel investors may require businesses to relinquish some equity, potentially leading to reduced control over business decisions. Financial compensation: Angel investors expect compensation in the form of equity, which can be more costly than traditional debt financing.
What is the failure rate of angel investing? ›
Angel investing is highly risky (expect a 70% failure rate) and the investments are illiquid.
