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
Advantages of angel investors
Less risk: When you receive funding from an angel investor, there's typically less risk than if you take out a small business loan. Unlike loans, you're not responsible for paying back the funding from an angel investor because they receive equity in exchange for financing.
What are the pros and cons of angel investing? ›
WRITTEN BY:
| Pros | Cons |
|---|
| Support from credible and knowledgeable investors | Unsolicited business advice |
| Networking opportunities available | Swift business growth is expected |
| Future financing opportunities | Accessibility can be based on who you know |
| Less rigorous qualification requirements | Large ownership percentage can be requested |
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Advantages of angel investors
Less risk: When you receive funding from an angel investor, there's typically less risk than if you take out a small business loan. Unlike loans, you're not responsible for paying back the funding from an angel investor because they receive equity in exchange for financing.
Why would an angel investor want to invest in a startup? ›
Most angel investors are relatively wealthy individuals who are looking for a higher rate of return than can be found in more traditional investment opportunities. They search for startups with intriguing ideas and invest their own money to help develop them further.
What are some risks of angel investment? ›
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.
Do angel investors get paid back? ›
Angels get their payback through an exit that lets them liquidate their stake and potentially make a profit that's based on the percentage of the business they own. Generally, investors will pre-plan the details of the exit when negotiating the term sheet before they invest in the startup.
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%.
How does an angel investor get paid? ›
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.
How much return do angel investors expect? ›
What Percentage Do Angel Investors Want? The more money an angel investor gives your business, they more they'll expect a bigger return on investment (ROI). The ROI expectation varies between angels and the specific investing opportunity. It's not uncommon for an angel investor to expect a 30% return on their money.
What happens to angel investors if a startup fails? ›
Like any high-growth investment, angel investing comes with substantial risk but sizable upside potential as well: High startup failure rate — 50% or more of seed-stage startups fail due to a lack of product-market fit, funding, or revenue. Angels assume the risk of losing their entire investment.
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.
What are the disadvantages of business angels? ›
Disadvantages of using angel investors
Equity dilution: In exchange for funding, business angels usually get a portion of your company's ownership. Loss of control: Angel investors have vested interests in your company's growth. They may request board seats and take an active role in business decision-making.
Do most angel investors lose money? ›
The biggest risk in angel investing is the risk of loss. Unlike other investments, such as stocks and bonds, there is no guarantee that you will get your money back if the company you invest in fails. In fact, most startups fail, and many angels lose their entire investment.
Is angel investors good or bad? ›
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.
How many angel investors lose money? ›
Yes. The only academic study of American angel investments found that angels lose some or all of their money in 52 percent of their investment deals because the companies go out of business.
Is angel investment a good idea? ›
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.
Is it a good idea to be an angel investor? ›
A general consensus is that angel investing is a high-risk initiative, so you should only put money where you're ready to lose. Generally, that should be no more than 10-15% of your Net worth.
Is angel investing a good investment? ›
Angel investing is a good option for startups to raise large amounts of capital without being constrained by the requirements that go along with taking out a loan. The main disadvantage, however, is the fact that it requires trading off a certain amount of ownership in the company.
What is the failure rate of angel investing? ›
Like any high-growth investment, angel investing comes with substantial risk but sizable upside potential as well: High startup failure rate — 50% or more of seed-stage startups fail due to a lack of product-market fit, funding, or revenue. Angels assume the risk of losing their entire investment.
