A lot of entrepreneurs looking to establish a startup get confused on the best source of funding to seek for their business. In fact, there are many ideal options to choose from, and it can be an overwhelming process at times. Having said that, jotting down the advantages and disadvantages of each source can assist you to choose the ideal one for you.
A few days back, we have published an article that clears out the confusion between Accelerators and Incubators. In this regard, we have jotted down both the advantages and disadvantages of sourcing fund from Angel investors.
Who are Angel investors?
For the starters, Angel investors are wealthy individuals or groups of individuals who invest their own money in a startup or early-stage small businesses. The Angel investors can be professionals such as doctors and lawyers; business associates.
Advantages of seeking fund from Angel Investors
#1 Flexible and risk-taking
When compared with others, Angel investors are usually negotiable, since they invest it from their own pocket. In most of the cases, many angels are successful entrepreneurs who have cashed out and understand the amount of risk involved with establishing a business. This flexibility and risk-taking ability make Angel investors one of the best sources of capital.
#2 No repayment or interest required
Unlike banks, Angels fund business with the money you need to get going and, in exchange, they get an ownership stake in the business typically starts at about 10 per cent. If the startup takes off, both will reap benefits, if not, angel investors don’t get paid back.
#3 Offer valuable knowledge
Since most of the angels are season investors, they can provide contacts, expert support, and guidance that can support your business grow swiftly. Their insight and resources can be of tremendous value for the company’s growth.
#4 Suitable source to get business going
Angels are the best source if you require funding to get the business established. They usually invest in amounts from a few hundred thousand dollars up to $2 million. For more capital, entrepreneurs can raise more money through venture capital.
#5 Angel investors are found everywhere
One of the worthiest things about angels is that they can be found everywhere. In fact, some groups of angels meet frequently to explore local and regional opportunities that may be available.
Disadvantages
#1 Higher expectation!
With high tolerance and risk comes higher expectations. Since they are in business to make money, angels expect to see a return on their investment. Customarily, most angels will give around 5 to 6 years to hand out the return. At times, the pressure to deliver results can be intense as well.
#2 Future profit is limited
Since you’re trading equity in your company as part of the deal, you’re essentially giving away a portion of your future earnings based on the ownership stake you agreed before. For example, if you give the angel investor a 33% stake in your company, then $1 out of every $3 is going to angles pocket. It might not be a big deal initially, but when image when your business takes off.
#3 You will lose some control over your business
Typically, Angel investors often take an active role in the decision-making process. Plus, they will seek a way to exit after they’ve received the return that they want.
#4 Don’t expect to receive to follow up investment
Due to the risk involved in the business, most angels are unwilling to invest additional funds. Having said that the scenario may change if the business is generating profits.
#5 Take longer to find a suitable angel investor
While some angels genuinely look beyond the promise of monetary returns, some are greedy and motivated only by money rather than taking interest in promoting the startups. In this case, it is better to obtain complete information about the character and reputation of the angel investor before proceeding.
Image: Stock photos from Elnur/Shutterstock
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