If you're in the early stages of starting a new business, seeking funding from angel investments provides some financial help without you having to take on any debt. Working with such investors gives access to their expertise and financial wisdom, both of which are important in the initial stages of building a business. Understanding the advantages and disadvantages of obtaining this funding can help you determine whETHer this financing route is right for your business.
In this article, we discuss angel investor meaning, what are its advantages and disadvantages, and how to decide if it's best for your business.
Angel Investor Meaning
Also called a seed or private investor, angel investors actively seek out opportunities to provide funding for entrepreneurs or start-up companies. They are often individuals with high net worth who are seeking new mETHods of expanding their wealth while simultaneously helping to launch an up and coming venture.
By investing, angel investors are not simply loaning funds to a project or company. Instead, they often require some percentage of ownership in the venture based on their initial investment. In some cases, the investment may occur continually, as the enterprise develops. But, it may also take place as a one-time contribution that helps the venture get started.
Within the blockchain industry, angel investors are often participating in private sales that precede the public or crowd sales - also known as Initial Coin Offerings or ICO events.
Types of Angel Investors
There are many types of investors who typically choose to invest their own money. They often provide the funding necessary to meet the financial need for a business to start. While business owners may receive funding from individual donors and larger sources of funding, such as venture capitalists or lenders, investors who do angel investing make up the rest. While this is a general definition, there are several types of investors in this category, including:
Family and Friends: This is the most common category of investors and the best place to look for funding, especially for startups. For example, if you want to start a bakery, you might ask your extended family if anyone is willing to contribute to the cost of renting the storefront.
Philanthropists or Wealthy Individuals: Depending on the industry, people with a high net worth such as philanthropists or successful business owners may offer a large sum in exchange for a high amount of equity in the startup. For example, a doctor may invest in a startup seeking to design medical software and ask for 15% equity in the company in exchange for the investment.
Groups or Organizations: Occasionally, several individuals get togETHer to operate as a group, raising the level of potential funding significantly for the business that the group funds. For example, an animal rights volunteer group might each donate $100, combining resources to fund the new local animal shelter.
Crowdfunding: This type of funding has become increasingly popular, and includes many people investing small amounts of money online with a specific funding goal. For example, if a startup needs $40,000 to purchase supplies, the owner might set up an online funding platform, allowing individuals to give, invest or donate any dollar amount they want.
How Does Angel Investing Work?
During the angel investing process, startup founders and co-founders pitch their business to potential investors, who may choose to provide or decline funding. The steps of this process include:
Finding angel investors: Startup founders can find angel investors through their personal network, online platforms, and events in the startup community.
Doing your research: Not every angel investor is the right match for every company. Some investors specialize in a particular domain (such as healthcare or software). Angel investors may also differ in the approach they want to take with your company – e.g. serving as a mentor vs. being totally hands-off.
Making the pitch: Founders should prepare a pitch deck that gives a brief overview of their company and its major selling points. The pitch may be done in person, or over email to set up an in-person meeting.
Negotiating the terms: If angel investors like the pitch, they’ll offer a deal. Like everything else in business, the terms of this deal can be negotiable. Consider discussing factors such as the amount of equity, the company’s exit strategy, and even giving investors a seat on the board.
Difference Between Angel Investor and Venture Capitalist
- Like angel investors, venture capitalists are a common source of funding for startups and small businesses. The essential difference between VCs and angel investors is:
- Angel investors are high-net-worth individuals who invest their own money in startups.
- Venture capitalists are employees of VC firms, who invest the capital of other individuals, corporations, and pension funds.
- This difference has multiple repercussions in practice. Angel investors typically invest at earlier stages, and invest smaller amounts of money than venture capitalists.
Advantages and Disadvantages of Angel Investing
Angel investing has both advantages and disadvantages. Receiving funding for a startup can be a complex process, so it's important to think through what the company needs to be successful. Here are some advantages and disadvantages:
Advantages Of Angel Investment
- The major advantage to angel investment is the minimal risk posed to the business owner, especially when compared to taking out a loan. Unlike loans, you don't have to pay back the original investment sum, since the investor receives equity in the company. Many investors understand it may take time to see a return on their initial investment, since they are well-versed economically.
- The amount of experience the investor has can benefit the startup immensely, as investors may provide wisdom and guidance for the startup. With such a high stake in the company, they want to see the startup succeed.
Other Advantages Of An Angel Investment:
- Credible reputation through association with the investor
- Networking opportunities for potential stakeholders or customers
- Contacts with other respected professionals
- Knowledge of the market and of competitor's strategies
Disadvantages Of Angel Investment
- Due to the sizable amount of risk that comes with investing in a startup, such investors look for a large percentage of equity. To secure funding, many business owners give away between 10% and 50% of their startup to various investors. Investors may ask for a high rate of return on their investment, putting added pressure on the owner and employees. Before accepting funding, stakeholders should evaluate if the company has the potential to grow at the rate the investor expects, and establish expectations for growth.
- Another disadvantage is the loss of control the owner has in the startup's direction. Since they contribute their personal funds, many investors have a desire to get involved in business decisions. For example, they may encourage you to create an exit strategy, such as selling the startup to a larger company.
Closing Thoughts
True to their name, angels have really done wonders for many entrepreneurs and the startup ecosystem. Over the last decade, the number of these investors has grown immensely as many individuals look to capitalize on the successes of their friends and peers.
Today, founders are almost spoiled for choice with such a variety of groups to approach. With angel investor meaning under your belt, you now hold the key to success by finding the right matches, and presenting your pitch well.
