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Angel investors are a group of people who provide capital to an entrepreneur in exchange for equity. The investor may be looking at the company’s potential long-term growth, or they may just believe that your idea is too good to pass up. Either way, angel investing can help ease some financial pressure on you and give you time to take your business further before raising money through traditional means like venture capitalists or loans.
Angel investment is a less formal and more flexible approach to obtaining funds, particularly when compared to more professional investors like venture capitalists, and it isn’t suited for every firm.
We’ve compiled a list of seven benefits and seven drawbacks to consider before requesting angel investment for your company.
Advantages
Angel investors are a fantastic alternative financing option for a firm that may not be able to receive a small business loan, whether it’s because it’s too young or because it’s in a higher-risk field. The following are seven reasons why angel investors can be a good fit for your firm.
1. More Flexible
Angel investors are good supporters for new enterprises because angel finance is less formal and more flexible than other sources of startup funding. Angel investors, on the other hand, will want to see that the firm is developing and predicts quick development before investing.
2. All Locations & Industries Are Eligible
While many successful businesses emerge from big cities such as New York, Boston, and San Francisco, great firms may also be found in every tiny town in between. Angel investors are looking for such companies all around North America. According to a study from the Angel Capital Association (ACA) in 2021, the ACA has about 8,500 members in 30 states and two Canadian provinces.
Furthermore, since angel investors only support enterprises that they are interested in, practically any sector may obtain investment. Technology, finance, health care, consumer products, education, government, and energy were among the sectors funded by angel investors, according to the same 2021 research.
If there is a large return on investment, angel investors are often ready to take on higher-risk enterprises or sectors. These investors may step in and fund sectors that banks and venture capitalists would otherwise dismiss as too risky.
3. There is Very Little Paperwork
While you’ll need a presentation, financial forecasts, and a business plan to complete an angel investment, you won’t require nearly as much documentation as you would for a business loan. The investment is usually completed with the use of a convertible note, which is a short-term loan with an interest or discount rate, a value cap, and a maturity date. On a certain date or event, investors may convert a convertible note into preferred shares.
4. Payments are not required on a monthly basis.
Angel financing does not need monthly payments since it is not a loan. Because you won’t be making a monthly loan payment, this might aid your short-term cash flow. Angel investors are compensated when a business is acquired or additional capital is obtained.
5. Guidance & Support Are Included
You’re not only getting money from an angel investor, but you’re also learning from them. This is important for a company since it allows you to rely on the investor’s expertise when making business choices, resulting in higher success.
6. There Are Networking Opportunities
Angel investors may connect you with new customers, assisting in the growth of your company. Investors may also put you in touch with other firms they’ve backed, which can help you build strategic alliances. Some of those other companies could be interested in making a strategic investment in your firm, which might lead to an acquisition later on.
7. Future Funding Assistance Is Available
Angel investors are rewarded when your firm gets through subsequent investment rounds, so there’s an incentive for them to assist you get there as fast as possible. Angel investors will connect with other investors to help speed up the process, giving you more time to focus on your company rather than on finding new investors.
Drawbacks
While hiring angel investors to finance your company has its advantages, it isn’t the best option for everyone—and you may not even be able to locate one. Furthermore, you’ll be giving up a percentage of your company’s stock, which may cause extra issues. Here are seven reasons why angel investing may not be the best option for you.
1. Your availability is determined by who you know.
While there are several internet platforms for finding angel investors, such as AngelList and FundersClub, finding investors is not straightforward. In many circumstances, having an established business relationship with an investor is your greatest bet for getting angel funding. They are already familiar with you and your company, giving you an edge over competing companies. If you’re dependent on unknown angel investors, your chances of persuading one of them to invest in your company are little to none.
2. Terms Can Be Ambiguous & Funding Can Be Slow
Negotiating conditions for a prospective contract may be difficult since angel financing is less formal than other kinds of startup funding. Both parties want to obtain a good bargain, which may lead to a lot of verbal back-and-forths but never a signed contract. As you attempt to complete the procedure, strive to have terms written into an agreement.
3. The Average Investment Amount Is Lower Than Venture Capital
Amounts as high as $1 million may be invested in an angel transaction, although this is unusual. In research issued by the American Capital Association in 2021, more than 70% of angel agreements were for less than $200,000. It’s possible that you’ll need to raise more funds quickly after accepting angel investment.
4. Investors must have the option to convert debt to equity.
Convertible debt is often sold at a 20% premium to angel investors. Investors may convert debt into stock at the next valuation. You give up more stock in your firm the more times you raise financing. Due to the stock handed away through angel and venture capital investments, initial owners may become minority shareholders in certain situations.
5. Expected Rapid Growth
Angel investors desire a quick return on their investment since they anticipate firms to develop quickly in the next three to five years. This implies that those investors will put pressure on you to keep developing your business, even if it goes against your long-term goals. Even if you aim to keep your company small, angel investors may have other expectations.
6. Founder Control Is Reduced & Roles May Be Unclear
You continue to give up stock in your firm as you raise cash via angel investment, which means investors have more authority over your company. While having more specialists to consult might help with decision-making and commercial success, it can also lead to the firm moving in a different route than you expected. Furthermore, having investors may make it harder to define leadership responsibilities inside the firm—and a power struggle between owners and investors might bring your company down.
7. Angel Investor Support & Guidance May Be Limited
While many angel investors are also specialists in the fields in which they invest, this is not always the case, since each angel investor contributes a unique set of skills. Before accepting the investment, you should check out the investor’s qualifications.
Furthermore, an angel investor may have invested in so many firms that they are unable to assist you as quickly as you would like—and they may have their own business interests that prevent them from doing so. If you’re dependent on an investor’s advice, make sure such expectations are explicitly disclosed before accepting the financing.
Conclusion
There are a number of things to think about before approaching an angel investor for funding. There are several advantages, including developing experience that may help your company grow. Angel investors are less concerned with risky businesses and sectors, and you may be able to utilize them to network with future investors.
You are, however, giving up part of your company’s stock and, as a result, some of your decision-making authority. Investors will demand a quick return on investment and will use their clout to get it. Furthermore, you may not be able to locate an angel investor at all.
Before going ahead with angel investments in your firm, consider all of the reasons listed above, as well as communicate with your financial and legal counsel.
