Working with an angel investor seems ideal for small businesses, especially startups. But, it’s not without its challenges.
Angel investors will usually take an equity stake in the company. And this makes it perfect for businesses that are short of funds or collateral for loans.
Angel finance sits between bootstrapping or family funding and extensive business loans.
Angel investing provides clear benefits for small businesses. But it has specific disadvantages that you shouldn’t overlook. Here are the most significant pros and cons of working with an angel investor.
1. Ideal for Startups
To secure the support of an angel investor you will need a solid business plan. And a convincing presentation. This compares favourably to working with a financial institution. They will expect proof of profitability and a proven business model. If you apply for a loan you will need to provide collateral as security.
This makes angel investing more readily available for startups than loans.
Family and friends can also provide the starting funds, but they might be limited. Angel investors, meanwhile, are likely to have the necessary funds.
2. It’s not a Loan
Because angel investing relies on equity, it comes with specific rules. Most importantly, the investor will take a stake in the business. And they will have an exit strategy if the business doesn’t take off. This means there’s no monthly payment obligation.
A significant downside of taking out a loan is that the business owner is liable even if the business fails. With angel investors, no direct payoff is expected.
3. No Risk-Based Limitations
Angel investors most often have no problem taking a risk on a startup that shows potential. But, this doesn’t mean they are reckless. Angel investors are usually successful entrepreneurs with plenty of experience. The funding they provide usually comes from their personal resources. Also, they often work within a network that helps to dilute the risk.
1. Greater Expectations
Angel investors are exposed to the startup’s risk. They expect high returns and often exert intense pressure in that regard.
Setting the bar high comes naturally with this type of financing. This compensates for the higher risk and no monthly obligations towards the investor.
2. Less Control
With a stake in the business, angel investors will take partial control of the company. With their experience, their influence on business operations could be seen as helpful.
Still, business owners are never too keen to relinquish control. But their choices are limited. The level of control that the owner gets to keep over the company will depend on the circumstances. There’s a risk involved with the direction of the business going forward. This balances the investor’s initial risk in financing the startup.
Working with Angel Investors
In summary, securing financing through an angel investor comes with advantages and disadvantages. Those can turn out to be relatively well balanced, as the risks and returns become mutual. Finding the right angel investor could prove to be the best way of taking a startup off the ground.