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
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
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
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
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.