CHAPTER SEVEN: Part B – Newton’s third law of motion states that “To every action, there is an equal and opposite reaction.” This also holds true in life and even in the game of small business financing. Bearing this law in mind, we can also assume that every advantage has its corresponding disadvantage.
Like every other business strategy, raising capital from angels also has its pros and cons. And it’s very important that you understand these before you start your search for the next available angel.
Six Advantages of Taking Angel Investment
1. Angels provide the startup funds you need
When all the funds you pulled together through your personal savings or gathered from family and friends are still not enough to start your business, angel investors can help you fill the needed equity gap. Since most startups require less than $500,000; most angels are able to single-handedly provide the needed funding for any business they are interested in.
According to University of Hampshire’s Center for Venture Research, angel investors provide about two-thirds of funding for new enterprises. Therefore, chances are high that you will get the funds you need from the first few angels you approach.
2. Angels make flexible business agreements
When compared to banks and venture capitalists, angel investors have more informal investment criteria. And their business deals are usually negotiable, since they are investing their own money. This flexibility makes angel investing an excellent source of capital for early-stage businesses.
3. Angels contribute their knowledge and experience
Since many angel investors are seasoned entrepreneurs who have funded and grown multiple businesses that later became successful, they can provide not only the capital you need, but also the contacts, expert support, and guidance that can help your business grow quickly.
An angel’s insight and resources are usually of tremendous value to a company’s success. So, you should always recognize the need for their help and readily embrace their participation in the operation of your business (if they have much to offer).
4. Angels don’t mind taking huge risks
The bitter truth is that most startups fail. In fact, recent research revealed that only one-third of investments are hits, with the remaining two thirds making very little money or fizzling out of market shortly after launch. But most angels are aware of this fact, yet they optimistically invest in high-risk early-stage businesses that have not established a solid track record of success.
Since they provide the funds you need to start your business, angels have no proven way of predicting whether your business will be successful or not in the long run. Despite this sore reality, angel investors tend to be quite enthusiastic about most new businesses and often go ahead to invest in them.
5. Angels don’t require monthly fees
Another advantage of taking funds from angel investors is that there are no monthly payments, such as the interests required by bank loans and credit cards. You pay angels the share of your profits that equates with their investment, and that is only after your business starts to generate profits.
So, with angel investing, you will be able to concentrate your time and effort into taking your new business forward rather than worrying about monthly interests and other fees that traditional lenders demand.
6. Angels are found everywhere, in virtually all industries
Nowadays, angels can be found everywhere, not just in traditional financial centers and districts. They also invest in virtually all types of businesses. Most of them are involved in industry-specific investments, based on their interests and expertise. But some of them are attracted to other industries as well. So, if your business idea has the potential for huge profitability and growth, then you will most likely win the heart of an angel investor.
Five Disadvantages of Taking angel Funding
1. Angels rarely provide additional investment when necessary
Because of the risk of losing even more money, most angels are unwilling to invest additional funds when this is needed to keep the business going or to save it from crumbling. They are only ready to invest more funds if the business is generating profits, not when it’s tanking.
2. Some angels can be dubious
Though most angels truly look beyond the promise of monetary returns, some angels are greedy and are motivated only by money rather than their interest in promoting the growth of your business. These angels tend to be less patient; as they usually expect quick returns. Another trait of bad angels is that they don’t show any concern about a business’s operations during the early stage of its development.
To avoid falling into the trap of these bad angels, it is crucial that you obtain complete information about the character and reputation of any potential investor before approaching them and agreeing to any terms with them.
3. Angel investing could be costly
In exchange for their investment in your business, angel investors would require a certain percentage of stake or equity in your company and expect a large ROI for their exit. To them, this is a reasonable bargain, since they are investing in a very young and risky business that has not yet been established.
In addition, angel investors, in their desperate bid to foster the growth of your business, may hire skilled professionals to run your business. These professionals usually demand more salaries and wages than you planned for. (Since angels have a say in the control of your business, you may have no choice but to run these costs).
4. An angel’s interference may lead to problems
The level of company investment varies from investor to investor. While it is expected for an angel investor to have certain amount of control in running a company, some angels abuse this advantage by trying to be dominant. The entrepreneur may be unwillingly forced to give up some degree of control in order to meet the angel’s requirements, which can often lead to embitterment on the entrepreneur’s part.
Another common problem is when the angel lacks industry experience, but yet goes ahead to give advice (bad advice) and mentoring that may lead to failure of the business. The above further explains why you should seek only angel investors with proven experience in their industry.
5. Angels do not have national recognition
There are well-documented directories of venture capital firms, banks, and other loan-issuing institutions. But there is no register for angel investors, which explains why they don’t have widespread recognition like VC firms and banks. This makes it difficult for entrepreneurs to locate them.
However, I believe this trend is changing as angels are now organizing themselves into groups based on either location or their target industry.