The Pros and Cons of Using Angel Investors | QuickBooks (2024)

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What are the benefits of angel investors? ›

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.

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.

The effective internal rate of return for a successful portfolio for angel investors is about 22%, according to one study.4 This may look good to investors and too expensive to entrepreneurs, but other sources of financing are not usually available for such business ventures.

Long-term investments can provide steady growth over an extended period, but they require patience and dedication. On the other hand, short-term investments offer greater liquidity and potential for quick returns, but they come with higher risks and require active management.

Advantages of seeking funding from business angels

Often, many angel investors are successful businesspeople who have cashed out and know the amount of risk involved in creating a business. This risk-taking ability and flexibility make business angels one of the best sources of capital for start-ups.

Access to expertise and mentorship: Angel investors often have valuable industry knowledge and experience that they can share with entrepreneurs, offering guidance and support. Lower interest rates on loans: Angel investors typically provide funding through equity investments, so there are no interest rates on loans.

An angel investor typically gets paid through a return on their investment, either when the company they invested in goes public or is acquired. This return can be structured in the form of a one-time payout, or through a series of payments over time.

50%-70% of individual angel investments result in a loss of some capital, according to the most authoritative academic data; the same is true for VC deals. and in any dataset there will be “unlucky” investors in the left hand tail of the distribution and some “lucky” ones in the right hand tail.

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.

Unlike a venture capital firm, an angel investor invests their personal funds, demonstrating individual commitment and financial involvement. However, they have a clear exit strategy to reap profits through an acquisition or public offering.

What is the con of angel investor? ›

Con: There are strings attached

When you hand over equity in your company as part of the deal, you're essentially giving away part of your future net earnings. The percentage of ownership an angel investor asks for typically depends on how much they're investing.

Angel investors are typically high net worth individuals who invest their own money in early-stage startups. They usually invest smaller amounts, ranging from $25,000 to $100,000, and take equity stakes of around 10-30% in the company.

Early stage investing is an inherently risky way to invest. The list of high level risks is long and includes financing risk, technical risk, and market risk. As angel investors, you need to be aware of the key risks you are taking with your investment.

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.

startups fail all the time: the five-year survival rate of all new businesses, let alone technology startups in the Southeast, is under 50%. 50%-70% of individual angel investments result in a loss of some capital, according to the most authoritative academic data; the same is true for VC deals.