When you’re a small business owner that needs funding, the promise of angel investors can sound like a bell which allows your vision to take off because it finally got its wings. Securing funding in today’s world can be difficult for any business at the start-up phase. The capital that these investors are able to bring to the table can be very beneficial, but most businesses will have to compromise with certain trade-offs if they accept the investment.
Are you thinking about starting a business? Does your current business need an investor to achieve its end-goals? Here are the pros and cons of angel investors to think about before you decide to pursue an offer in this area.
What Are the Pros of Angel Investors?
1. Angel investors are the most likely to take on the risk of your opportunity.
It can be very difficult to qualify for a small business loan. You might not be in a position to issue shares in order to raise capital. Every opportunity that comes your way may come with an answer of “No” associated with it because of the risk involved. Angel investors are willing to take on that risk because they’re looking more at the future potential than the current valuation as long as you’re willing to give them an ownership stake in the business – often 10% or more.
2. An investment from angels is not debt.
You’re not going to be forced to pay back funds with interest when you receive an investment. What you will need to do is provide an angel investor with an ownership stake in your business. The goal of the investment is for both of you to be able to find financial security through this business venture. If your idea doesn’t work out, you’re not stuck with debt hovering over your head. You’re also not stuck with the monthly payments that can cut into your general revenues quite severely in the early days of your business.
3. Angel investors give your business a better chance to find success.
Most angel investors are going to be actively involved with your business. You’ll be able to take advantage of their experience in your industry to begin building a solid brand. Angels help businesses stay active longer, experience larger levels of growth, and achieve a better rate of return than business who don’t have angels involved. In many ways, an angel investor becomes a mentor that is willing to pay you to be involved.
4. Angels often perform their due diligence very rapidly.
Unlike other types of capital or debt that you might access, the due diligence process for an angel investor is usually quite rapid. Many angels can complete this process in 30 days or less. The reason for this is pretty simple: most angels will only invest into businesses that are run by people they trust. You’ll find angels could be your next door neighbor, a friend of a friend, or within your professional network already.
5. You gain a link to their network and community.
Building relationships will always be at the core of a successful business. When an angel comes on-board, you gain access to their network immediately. You’ve become part of their community. This allows you to build relationships in ways that would take you years to do on your own. In return, your brand can expand exponentially and help both you and your angel profit from it.
6. Angels are literally everywhere.
Every industry today has angel investors that are just waiting for what they feel is the perfect opportunity. They invest in all markets around the world as well, which means every business has the chance to find the partnership that they need. Many communities even have groups of angels that meet regularly to explore local and regional opportunities that may be available. You don’t have to look very hard to find an angel investor if you’re serious about it.
7. Angel investments can happen at any stage of the business evolution cycle.
If you’re a start-up business, then an angel investor might be willing to put down $25k to help you build your identity. If you have a late-stage venture that is on the brink of success, you might find an investment of $1 million or more headed your way. Because of the flexibility of this type of agreement, angels are often ready to negotiate with you so that both parties can get the best deal possible.
8. You get a chance to give back.
Many angels take pride in their ability to give back to their community. You get to hitch along for this ride, helping people you might never get to help. Don’t underestimate the power of what this can do for your business.
What Are the Cons of Angel Investors?
1. A high tolerance for risk has its price.
Angel investors get involved with businesses because they expect to see a return on their investment. They are going to set the bar high for your success. If they make a large investment, then they’re going to expect your business to perform. Most angels will give you 5-7 years to hand out a return and they will put pressure on you every moment of every day to make that happen. That stress can cause some entrepreneurs to fold the first time they experience it because it can be so unexpectedly overwhelming.
2. You’re limiting your future profits with an angel investor.
Because you’re selling an equity stake in your business in return for an investment, you are giving away a portion of your future earnings based on the ownership stake you agree in exchange for the money today. If you give an angel investor a 33% stake in your business, then $1 out of every $3 you make is going to the pocket of the angel investor. That doesn’t seem like a lot until you start thinking in larger monetary terms.
3. You lose some control over your business.
If you pay for something, you expect to have some control over the experience you receive. That’s why when we receive poor customer service at a restaurant or a retail establishment, we feel dissatisfied. Angels feel the same way when they’re investing money into your business. Most angels want an active role in the decision-making process. Many business owners go into this relationship thinking that their investors will take a hands-off approach and find it to be a very different experience. Even if you do have a hands-off angel, you’ll be accountable for the decisions you make – especially if they cost the angel money.
4. Angels come in expecting a way to exit.
Most angel investors aren’t going to stick around for life. They get into a business opportunity to receive a return. Their goal is to find a way to achieve an exit after they’ve received the return that they want. If you’re making huge profits, then of course an angel might stick around for awhile. You must be prepared that when you receive this investment, an angel has already plotted the best way to get out.
5. Don’t expect to receive follow-up investments.
Angel investors are typically going to make one investment only. They don’t want to be seen as a bank that allows you to withdrawal funds whenever you feel it may be necessary. Angels want you to make your business work for you and for them. Even though they’re willing to take on more risks than others, they’re not going to keep investing into high-risk scenarios.
6. Not every angel investor has a mutual best interest at heart.
Some angel investors can be deceptive about their intentions with your business. They are impatient, are focused on a fast cash grab, and won’t provide any guidance or mentoring as you attempt to build your business. It’s up to you as the entrepreneur to perform your own due diligence on the angels with whom you’re interested in partnering just as they are performing their own due diligence with you.
7. Angel investors do not have the same level of national recognition.
You’re not going to find a database of angel investors that are available right now to hear your business pitch. You must go out and find them on your own. Many angels stay in the shadows just because they don’t want to be pestered with hundreds of phone calls per week from entrepreneurs that want them to get involved with their latest idea.
8. Some angels invest into companies that are outside their expertise.
Everyone wants to have a diversified portfolio in order to protect their best interests. Angels are no different. They will often look at industries outside of their regular experience to help diversify their finances. When an angel with limited knowledge comes into your arena, it can put you at a disadvantage even though you’ve got the investment you wanted.
The pros and cons of angel investors show that with the right partnership, great things can happen for any business. Whether it’s a start-up or an established business trying to market an innovative idea, angels can be the difference between success and failure. Avoid the disadvantages with proactive planning and you’ll be taking the first steps forward on your journey toward financial stability.