If you are a startup founder looking for funds for your seed-stage startup, you would be familiar with angel investors. Angel investing is the type of financing where wealthy individuals invest their own money in high-growth, high-potential startups in their early stages, in exchange for equity. As exciting as it sounds for a cash-strapped founder, one must always be wary of the pros and cons of any source of funding before taking a plunge in the funding process. This blog post tells you the pros and cons of leveraging angel investors for your startup. Read along!
Before diving deep into the pros and cons of angel investors, we strongly recommend reading our blog post, “Who Is an Angel Investor and How Does Angel Investing Work?” It tells you all about what is angel investing, who is an angel investor, what angel investors look for in a startup, and more.
Advantages And Disadvantages Of Using Angel Investors For Startup Funding
Let us begin with the advantages of leveraging angel investors to fund your startup:
Angel financing isn’t a loan
Unlike getting loans from a bank, getting an angel investor’s capital isn’t a loan. You are not expected to return the amount with interest. The angel investor knows and acknowledges the risks of investing in an early-stage startup and, thus, is prepared for any unfavorable scenarios.
The appetite for risk is high
As we’ve said before, angel investors are known for their high-risk appetite. Since angels invest at the earliest stage of a startup, the possibility of assessing the actual fate of the business is very low. Despite that, angels invest in such early-stage startups keeping in mind the business’ potential.
They bring years of experience
Most angels are entrepreneurs or have entrepreneurial experience in addition to years of working with other startups. Alongside the money, they also bring in the expertise and share lessons they have learned while working as entrepreneurs that can be extremely helpful for a first-time founder.
Amazing networking possibilities
Angel investors are well-connected in the industry. They can connect you with the right people who can help you grow the business.
Added advantage for future funding
Being backed by angel investors with a good record and a vast network can come in handy when you’re ready for the next round of funding. In fact, angel investors can help you get connected with potential investors and put in a good word for you!
Investment decisions can be made quicker
As the only person in charge of the money, the time to take investment-related decisions is relatively lesser for angel investors. They have the full authority to decide how much, when, and in which company to invest in.
Since business angels have worked in or with startups, they know funding a startup can be a comparatively less structured process. They tend to be more flexible about paperwork and processes in the early stages of the startup. Additionally, because they know the highly risky nature of startups, they are understanding the idea of a startup failure and not making money out of it.
While angel investors can sound like real angels in disguise, there’s another side to angel investing that many founders detest. Here are some of the disadvantages of approaching an angel investor:
They aren’t easy to find
Finding an external investor can be a time-consuming and tedious process. While those articles you read online might make it look like angel investors are everywhere, finding the right angel investor who has experience in your industry, a great network, and is willing to invest in your business can be cumbersome.
The capital is limited
Since the money that is invested by angel investors comes from their own pockets, the capital might often not be enough to fund the startup at its seed stage and beyond. In such cases, angel investors end up forming syndicates through angel networks so the capital can be increased substantially. However, in the long run, this can be a challenge.
Expectations are high
As angel investors take huge risks, they often do it in expectation of higher returns. They expect rapid growth and look forward to up to 10 times their own investment in return over a period of five to six years.
Loss of control over the business
When angel investors fund a startup, they do it in exchange for a percentage of the equity. Often, it is between 10-20% of the business. While this means losing authority over a part of your business, it also means giving a part of the decision-making power to the angel investor. Since they have invested in your business, you will have to oblige. If not, you might not get further funding, and your reputation in the network might be at stake.
What We Recommend
If you are looking for a flexible, highly scalable, 100% digital process of raising funds that require no equity dilution, we recommend revenue-based financing. This founder-friendly approach lets founders raise funds without diluting equity, and the repayments happen as a percentage of monthly revenue. You can learn more about revenue-based financing in our ultimate guide to revenue-based financing.