Getting Funding From Angel Investors - Pros and Cons

Josue Drury, CEU, MA in Economics and Business

July 17, 2021

Startups can be very different, but what they definitely have in common is the fact that they need funding. In early stages one of the most prevalent ways of funding comes from angel investors. In this article we will dig more into this topic!

Angel investors - supernatural creatures or businessmen?

Let´s first explain what the term “angel investors” means!

Basically, in a simple explanation, angel investor refers to investors who are willing to invest their money into early stage business, in order to develop the business, create value, and generate enough profit to take their money back and some profit afterwards. One of the main reasons entrepreneurs opt for Angel investors as their seed investors is that they not only provide money for the startup, but also provide all strategic support for the business growth.

Having all of this in mind, we are going to present Pros and Cons of getting money from Angel Investors to fund a startup.

Pros of getting funding from an angel

PRO 1#: Flexibility in the negotiation

Angel investors typically are individuals who are investing their own money and may be successful entrepreneurs who have faced similar situation as people who are in first stage of their business. Because of that, business deals can be negotiable, as it may offer a more informal agreement between the two parts.  

PRO 2#: This is not a loan to be repaid

Whenever you go to finance your business by taking loans from banks, you will need to repay the amount that you requested and the interest on it, no matter you venture is profitable or not. Having angel investor(s) as your financial sponsor(s) would avoid such headache with the bank, and the risk that the bank may reject lending money to you if there is not a guarantee behind the deal. If both parties agree, the investor will give you the necessary capital and in exchange he/she will receive an ownership stake from your company.  In case the startup takes off you and your investor can obtain the financial rewards. If the startup does not take off and if there is not such clause in the contract, angel investors will unlikely expect that you pay back the amount invested, as it is a risk that that they are aware of.

PRO 3# Transfer of knowledge  

Normally, when you start your own business, many individuals do not have enough experience and the know-how regarding how to conduct a company via its operations, sales, and management point of views. That´s how an angel investor comes in good time. Angel Investor not only provide money, but also their expertise, network contacts, and guidance in order to thrive your business idea. Definitely it is a very good advantage for beginners.

 

PRO 4# Continuous capital raising

The majority of early-stage startups require small amounts at the beginning to start the operation. As soon as the business start growing and the necessity of acquiring new assets and hiring new professionals, more money will be necessary to be invested into the startup. With a hope of a future promising reward, angel investors can invest more money into the business, in exchange of ownership`s stake.

Cons of getting funding from an angel

CON 1# Higher Expectations from Investor Side

It is true that having angel investors to inject money into your business as well as acquiring their expertise are remarkable actions, we cannot forget also the commitment and responsibilities from the businessmen and who initiate the startup and their staff. Everybody may have heard about such expression from Spider- Man movie: “With great power comes great responsibility”, so here: With higher risks comes higher expectations”, from angel investor perspective. So, do NOT forget about that!

CON 2# Limited Profitability

Angel investors normally require a certain percentage of ownership from the startup in exchange of all investment made.

CON 3# Losing Partial Control of the company

As angel investors are willing to invest the seed money to help you grow your business, it is expected that they will take an active role in the decision-making. Are you willing to let somebody take over and influence on most decisions on how to run your business?

CON 4# Lack of further investments from angel investors

In case your business is not being profitable at all, not only you will need to give explanations for the investor or group of investors, but also you may not receive further investments, which could cause instability into your business.

The bottom line

Certainly, it is a big decision to make when deciding on getting money from angel investors. You need to have a clear understanding about all conditions that the investor will impose in order to support your business. You should really weigh all the scenarios to see whether it is worth to choose an angel investor to fund your business, but certainly, besides the CONS, many startups have thrived after receiving the help from angel investors worldwide. And you? Are you ready to go to the next step?

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