There are pros and cons in angel investing,
yet despite these differences, the advantages seem to considerably outweigh the
disadvantages. Some benefits lie in the unique characteristics of angel investors
and their added value to a company. They are also geographically dispersed and can
provide the amount of needed funding that most startups may require.
Angel investors also tend to seek smaller deals, prefer to invest in risky, early-stage
enterprises, and invest in practically all industry sectors. In addition, many desire
a small amount of control in their invested firms and tend to avoid follow-on investments.
Some angel investors are truly enthusiastic about the
opportunity to invest in a company in order to promote local economic growth,
while others may only be concerned with monetary gain. Another disadvantage is that
angel investors lack national recognition, which is a quite different approach than
that of venture capitalists. It is critical that an entrepreneur be aware of these
differences so they can make an educated, informed decision when raising angel capital for their startups.
The advantages of angel investing
1. Can provide the needed capital for a startup
When entrepreneurs have exhausted money from friends and family, personal savings,
bank loans, and credit cards for their startups, they may seek angel investors to
help them fill their needed equity gap. According to the Center for Venture Research
at the University of New Hampshire, nearly 2/3 of funding for new enterprises is
obtained from angel investors. Therefore, angel investor capital can provide a great
source of funding for new businesses that have a high potential for growth.
2. Ability to raise capital in small amounts
Most early-stage ventures require small amounts of money, typically less than $500,000.
Angel investors can provide this needed amount, using their own personal funds for
the investment. Venture capitalists, on the other hand, typically pool money from
different sources, generally invest in later-stage companies that have already established
stability and success, and invest in enterprises in need of at least $500,000 to
$1 million.
3. Flexible business agreements
Angel investors have a more informal investment criteria compared to the traditional
financial lenders, including banks and venture capitalists. Because they are investing
their own money, their business deals can often be negotiable. Because of this flexibility,
they are more likely to be excellent sources of capital for early-stage businesses.
4. Can bring forth vast knowledge and experience to a new company
Many angel investors were once entrepreneurs themselves and have founded several
successful companies under their leadership; therefore, they will not only provide
the needed capital that entrepreneurs need but they can also offer desired support,
expertise, and contacts in making a business grow. An angelâs insight and resources
are of tremendous value for a companyâs success, and an entrepreneur should always
recognize the need for help, embracing the participation of their angel investor
in daily business activities.
5. Involved in high risk investments
An angel investorâs capital in a new business is considered to be a high-risk investment
since the new company has not yet established a solid track record of success. Since
they often provide the initial funding for a new company, it can be quite difficult
to determine if their invested enterprise will be successful in the long run. Despite
the fact that most new businesses fail in their initial years, angel investors tend
to be quite optimistic about their investment choices and often request a large
amount of returns to counterbalance the risk.
6. Does not require high monthly fees
Another benefit from raising angel capital is that there are no outstanding payment
rates such as the ones that bank loans and credit cards require. Many entrepreneurs
enjoy this element of angel investors, concentrating their time and effort into
taking their new business forward rather than worrying about high monthly payments
and fees that traditional lenders enforce.
7. Community involvement
Many angel investors choose to invest locally. The capital they provide for a new
business will not only assist the launch of a new enterprise but it will also create
employment opportunities and help stimulate economic growth by encouraging consumers
to purchase their products. Many angel investors take pride in using their expertise
in giving back to their community. These are the angel investors who look beyond
monetary return.
8. Are located everywhere, in practically all industries
Nowadays, angel investors can be found everywhere, not just in traditional financial
centers and districts. They also invest in nearly all markets worldwide. The majority
of them are involved in industry-specific investments, according to the level of
their expertise. Similar to venture capitalists, angel investors tend to focus on
technology, but are also attracted to other types of industries as well. Regardless
of the market sector that an angel is involved in, what attracts an angel investor
to a specific venture is the potential for a companyâs profitability and growth.
The disadvantages of angel investing
1. Rarely make follow-on investments
The reason why most angel investors are less likely to make follow-on investments
is because of the risk associated with losing even more money when reinvesting in
an unsuccessful company. On the other hand, venture capitalists have a different
approach to follow-on investing. They tend to spend approximately 2/3 of their funds
on follow-on investments, taking the opportunity to allow companies to expand while
diversifying their current portfolio firms.
2. Can actually be deceptive
While the majority of angel investors truly look beyond the promise of monetary
return, there are a few angel investors who are greedy and motivated by money rather
than in promoting the good of the firm. These angel investors tend to be less patient
with new entrepreneurs and do not provide any mentoring or guidance during a companyâs
early stage of development. To avoid such complications, it is crucial that an entrepreneur
obtain complete information about the character and reputation of any potential
investors before pursuing and agreeing to any terms.
3. Can be costly
In exchange for providing the needed startup capital for a new company, many angel
investors often require a certain percentage of stake in a company, starting at
10% or more, and expect a large ROI for their exit. From their perspective, this
is a reasonable exchange since they are investing in very young and risky businesses
that have not yet been established. In addition, angel investors may hire skilled
professionals to ensure the day-to-day business operations.
4. Active company involvement can lead to problems
Each level of company involvement varies from investor to investor; however, it
is not uncommon for an angel investor to have a certain amount of control in running
a company. The entrepreneur may unwillingly be forced to give up some degree of
control in order to meet their angel investorâs requirements, which can often lead
to resentment on the part of the entrepreneur. Another problem that may arise is
the angel investorâs lack of industry experience. This limited knowledge adds very
little value to a companyâs success. That is why entrepreneurs should only seek
angel investors with proven experience in their industry.
5. Do not have national recognition
While there are well-documented directories of venture capital firms available,
there is no national register for angel investors. Due to these differences, angel
investors do not have the national recognition as their VC counterparts. They remain
hidden and mysterious but choose to do so in order to have a degree of separation
from entrepreneurs, who may pester them with their business plans and telephone
calls.