Angel investors can be pivotal figures for small businesses, considering many businesses struggle to find capital that helps them scale. Many small businesses need an initial cash infusion to kick-start their business procedures and start rolling some cash flow.
Deciding whether they are indeed good for your business will involve looking at both the pros and cons of siding with an angel investor.
Who Are Angel Investors?
Angel investors are individuals that are in a position to invest anywhere between 5 percent and 10 percent of their funds into risky investments. These investments are small businesses and startups that are looking to make it big in the industry. Essentially, the name angel investors come from investors that used to finance Broadway shows.
Back in the day, this investment was looked upon as a bad choice, and investors could not make a large profit. Therefore, to people that were running the Broadway shows, investors that came along to finance them were looked upon as angels. This is because most of the time, they lifted the actors and helped them recover huge financial losses.
In other words, they were funding without any great returns. Today, the idea behind angel investing is somewhat similar, but the investments and investors have changed. The modern angel investors in today’s society are CEOs of huge companies or even senior executives that earn a handsome salary.
Instead of Broadway shows, these investors look for startups that have potential. More often than not, angel investors will pour their money into startups that have a story that inspires them. Other times, they will invest because they like the segment that a small business is trying to dominate.
How Do They make the Investment?
Angel investors can make their investments using many different ways. The first method through which they make an investment is direct. They will approach a business, or a business will approach them and pitch their story and idea.
Another way in which angel investors go about their business is via angel groups. This involves associations and entities of all angel investors. Here, they all come together as a group. This group will sometimes form a special purpose vehicle or an LLC. It can also be a joint venture. This allows different angels to collectively invest in small businesses instead of making individual investments.
Small Businesses Can Find Their First Break
Angel investors are always going to be the first break for startups. For a small business, the angel investor money is the first source of real money that comes in after their friends and families have pitched in. This also represents the money that businesses will be using over the course of their seed financing cycle in order to get to the next phase of growth. This is the phase in which venture capitalists and other firms start showing interest in the business.
Hence, if you run a small business, landing an angel investor will not only help you stabilize finances but will also provide your business with a segue to other investors as well.
Additionally, if they know your industry, they will help introduce you to other potential investors, business development teams, and more.
They can also link you with distribution and deals. This added networking benefit can be instrumental in helping your small business get to its milestones quicker.
Easier to Raise Money
If you compare angel investors with institutional investors, you will find that it is comparatively easier to raise money from the former rather than the latter. Angel investors are generally people that invest their own hard-earned money into your business.
The amount depends on your angel investors and their personal net worth. Some angel investors that run their own businesses can also go as high as a million. Nonetheless, even if their investment is not as significant, keep in mind that they help introduce you to important people in the industry.
Not to mention, compared to institutional investors, angel investor investments are faster and easier and have fewer due diligence requirements.
Easy to Work With
Angels are easy to work with. At the early stages of your seed financing cycle, you will be at an experimentation phase. At this time, your focus will be to really try and iterate your product or service so that it is market-ready. This means that you will want to make sure that your product fits the market.
For this, you will have to test the product a lot, present it to the market using different angles, and also modify it so that it starts hitting the mark. An institutional investor or a firm will not give you room to do that and possibly halt your investment if your business does not make timely returns. This also sends a negative image to the market.
An angel investor, on the other hand, is different. If they find that something is not working, instead of being distraught and giving the business troubles, they are likely to work with the business and suggest ways for a turnaround.
In other words, they have more empathy with the business that is not limited to a contractual agreement. This is why they are not only going to be easy to work with, but they will also understand small businesses’ unique issues.
Setback – Less Funds
When deciding whether an angel investor is good for your business, consider the amount of funds that your business really needs. Unless your angel investor runs a multimillion-dollar company, most angel investors are salaried people that can only afford to provide you a small sum. Therefore, you cannot expect extravagant help from them.
The investment compared to a venture capitalist firm is going to be smaller. One way to overcome this problem is by going after a special purpose vehicle and targeting the managing members of the vehicle so that you can raise a collective amount.
It is Difficult to Find Them
Small businesses can have a very hard time finding an angel investor that is suitable for them. Even if you use online tools and resources, the chances of connecting with one that you are compatible with are low.
This is not to say that you shouldn’t look for them. If your business’s framework is solid, fills a gap in the segment, and your story is compelling, many angels will be willing to invest in it.
Giving Up Equity
Ultimately, as a small business, you will have to give up equity to get angel investors’ funding and trust. Since you will be raising on possibility and future, you can expect the angel investors to demand a significant equity upfront. Giving up equity is not only giving up your end of the profit but also your ownership and control over the business.
This can be very troublesome for some business owners. Hence, you must be prepared to give up equity. This is not to say that you cannot settle on a negotiation. Furthermore, as a small business owner, you must strategize a good founder exit down the line.
Angel Investors Can Bqe Unpredictable
Angel investors are investing because they have a budget in the finances that allows them to. Therefore, do not expect them to treat you the same way an organized venture capitalist treats you.
They do not have a systematic method to their process and, in most cases, do not have the experience of a full-time professional. You cannot expect the same level of sophistication from an angel investor. However, some investors are successful entrepreneurs that have built businesses in the past that are similar to yours.
Is an Angel Investor Worth it?
Many of the giant corporations that you see today received funds from angel investors in their growing stage. Unlike venture capital firms that contribute large investments, angel investors offer seed funding that can get your business moving slowly and organically to the next stage.
Even though they vary in size, angel investments generally consist of small amounts of capital. As a small business owner, getting this small capital boost will contribute to organic and natural growth and experience.
On top of that, you will get the added networking benefit of making your presence in the specific industry. Even though the large investment of venture capitalists may sound more appealing, receiving a high amount of funds at the earliest stages of business can lead to complications.
Considering all the above-mentioned pros and cons, it is fair to say that angel investors can be critical for small business success, as long as you negotiate a reasonable deal with them, especially over equity. The general rule of thumb is to not allow for more than 20 percent of equity to the angel investor.
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