Pros And Cons Of Angel Investing
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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 angel’s insight and resources are of tremendous value for a company’s 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 investor’s 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 company’s 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 company’s 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 investor’s requirements, which can often lead to resentment on the part of the entrepreneur. Another problem that may arise is the angel investor’s lack of industry experience. This limited knowledge adds very little value to a company’s 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.

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