Angel funding is a form of investment provided by high net worth individuals, known as angel investors, to early-stage and startup companies. Angel investors typically provide funding in exchange for equity in the company, and may also offer mentorship, guidance, and access to their networks. Angel investing can provide a significant source of capital for startups, particularly at the early stages when other funding sources may not be available.In this article we discuss some pros & cons of angel investing for startup.
The process of securing angel funding typically involves creating a detailed business plan, presenting it to potential angel investors, and negotiating the terms of the investment. Startups should be prepared to provide detailed information about their business, including financial projections, market analysis, and competitive landscape.
It’s important to note that angel investing is a high-risk form of investment, as startups have a high failure rate. However, if a startup is successful, angel investors can see substantial returns on their investment.
Types of angel investors
Angel investor is a somewhat general term and you can find this angel investor in various forms, including:
- Friends and family: This is the most common source of funding for startups and is often the first place startups look for funding.
- Wealthy individuals: Depending on the business, individuals who have a high net worth, such as doctors, engineers or successful business people, are often ready to invest a substantial amount of money in exchange for equity in a business.
- Groups: Many angel investors are gradually starting to operate as part of a group. This increases the potential for a higher amount of investment significantly.
- Crowdfunding: This kind of funding is becoming more common. It allows large groups of people to invest small sums of money to help the company achieve a specific funding goal.
Some Pros & cons of angel investing for startup-
Pros of angel investors for startup
There is less risk involved than getting a small company loan, which is the main benefit of getting capital from an angel investor. In contrast to loans, angel investors provide cash in return for stock, thus there is no obligation to repay them. Angel investors frequently have prior investment experience. They have a long-term perspective and are aware that it may take a while before they see a return on their investment. According to research, firms sponsored by angel investors are more likely to see significant growth and offer a greater rate of return.Other benefits that a startup business can get by taking on an angel investor are:
- credibility from being associated with the investor
- contacts for potential employees or consumers
- connections with investment bankers, accountants and other professionals
- marketplace knowledge and strategies used in similar companies
- mentorship, guidance and valuable insights for the startup
Cons of angel investors for startup
Although angel investors help entrepreneurs expand their enterprises, this kind of capital has certain drawbacks, including the loss of equity. Many business owners offer investors between 10% and 50% of their starting companies. A high rate of return on investment is something that angel investors could also hope for, frequently up to tenfold in the first five to seven years. This could increase the pressure on the company and its promoters. It’s crucial to establish growth expectations before accepting investment and to ascertain whether the company can expand at the rate that investors would anticipate.
- Angel investing can be risky for the investor as startups have a high failure rate.
- The process of finding and vetting potential angel investors can be time-consuming and resource-intensive for the startup.
- Angel investors may also have high expectations for returns and may push for a quick exit strategy.
- Angel investors may want to have a say in the direction of the company, and if they don’t align with the founders vision it can create conflicts.
Tips for startups before approaching for an angel investment
If an entrepreneur is thinking about getting an angel investment for their startup, here are some tips they can consider:
1. Have a business plan
Consider writing a thorough business plan before seeking or accepting cash from an angel investor for the startup. The business plan can be useful when seeking funding from a lender or an investor. A thorough and convincing business plan is often what angel investors seek. Financial estimates, marketing plans and budgets, as well as details on the company’s target market, are frequently included in a solid business plan.
2.Be specific about what the investor is offering
Indicate in writing what the investor is providing the company in addition to financial support, as many angel investors anticipate providing their time and expertise to firms in which they invest. This could be serving on the company’s board of directors, serving as a mentor, functioning as a strategic advisor, offering the advantages of their networks and connections, etc. Even though the company will benefit from your increased involvement and the knowledge and experience you gain, it is preferable to know what to expect before you begin.
3.Establish roles
It’s critical to have a thorough understanding of each employee’s responsibilities within the company. The angel investor might have their own views about how to run the company, and in order to do so, they might want to know exactly what each employee’s responsibilities are. You can lessen the likelihood of a problem later on by defining duties up front.
Conclusion-
In this article we discuss pros & cons of angel investing for startup so if an entrepreneur is thinking about getting an angel investment for their startup, he needs to consider some tips for his business.