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
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 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.
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.
What happens to angel investors if a startup fails? ›
Investment Profile
Angel investors who seed startups that fail during their early stages lose their entire investments.
Why would a business prefer to work with an angel investor instead of getting funding from a bank? ›
Pro: The money isn't a loan
They provide you with the money you need to get going and, in exchange, they get an ownership stake in the business. If your startup takes off, then you both reap the financial rewards. If the business fails, the angel investor doesn't expect you to pay them back.
What are the disadvantages of angel investors? ›
Cons of angel investment
Loss of control and ownership: the most obvious disadvantage of raising financing through angel investment, is the loss of ownership and control of the company as founders may find themselves giving away between 10% and 50% of the shares in their company.
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 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.
Is it smart to get an angel investor? ›
Bottom Line. Many factors should be taken into consideration when working with angel investors. They can be advantageous to your business if you need flexible financing or are currently unable to obtain other funding sources. Be sure to note the potential disadvantages, such as company control and growth expectations.
What is the success rate of angel investing? ›
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.
Angel investing groups generally aim to take 20 to 50 percent ownership stake of early-stage companies. Therefore, structuring the deal and negotiating the terms begin with the valuation of the company.
What is a risk of working with an angel investor? ›
They Might Not Have Enough Experience. Another risk of raising money from angel investors is that they might not have enough experience investing in startups. While some angels are experienced investors, others might not be. This could lead to them making poor investment decisions and losing their money.
How many angel investors lose money? ›
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.
What is the minimum amount to be an angel investor? ›
Angel investors can be accredited investors with net worth of at least $1 million or at least $200K in annual income.
What is the average net worth of an angel investor? ›
High Net Worth Individuals
The typical angel investor is someone who's net worth is likely in excess of $1 million or who earns over $200,000 per year. Incidentally those look a lot like the credentials of an accredited investor.
How much do angel investors expect in return? ›
On average, potential angel investors expects to see a return of about 27% or 2.5 to 3 times their initial investment within 5 to 7 years. This means that if an angel investor invests $100,000 into a company, they expect to see a return of $250,000 to $300,000 over the next 5 to 7 years.
Why would an investor invest in a startup? ›
Diversification is a key strategy for long-term investment success, and startups offer a unique opportunity to diversify a portfolio in ways that established companies cannot. Investing in startups is a high-risk, high-reward game that offers great potential for returns and portfolio diversification.
What attracts investors to a startup? ›
Investors seek opportunities that have the potential for high returns on their investments. They look for startups with innovative ideas, strong market potential, a capable team, and a solid execution plan.
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.
Which are two benefits of using angel investors to help start a business? ›
Six advantages of business angel investors:
- BAs are free to make investment decisions quickly.
- no need for collateral ie personal assets.
- access to your investor's sector knowledge and contacts.
- better discipline due to outside scrutiny.
- access to BA mentoring or management skills.
- no repayments or interest.
