The idea of being an angel investor is really tempting, and many angel investors have found a lot of success with their endeavors. Technically, angel investors are those who invest in small startups or entrepreneurs, and often, they are among the entrepreneur’s family and friends. The angel investors may provide a one-time investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages.
They are called “angels” for a reason. Angel investors, according to other definitions, are also called informal investors, angel funders, private investors, seed investors, or business angels. They are usually affluent individuals who inject capital for startups in exchange for the company’s equity or convertible debt. Some angel investors invest through crowdfunding platforms online or build angel investor networks to pool in capital.
The biggest takeaway as to why most people would consider becoming an angel investor is that being a private investor allows for more favorable terms for both parties as compared to becoming a lender. Lenders would normally invest on the entrepreneur starting the business rather than the viability of the business itself. As an angel investor, they are more focused on helping startups take their first steps, rather than the possible profit they may get from the business.
Essentially, angel investors are the opposite of venture capitalists.
However, there are still challenges that could come along with this investment. It’s like when you get a physical gold IRA or simply invest in the stock market – you need to have a certain level of risk appetite to take on those challenges.
As such, before you decide to go out and start helping entrepreneurs, find out the pros and cons of becoming an angel investor to make sure that you make the most out of your investment money.
You do become the Angel that a startup business needs
Becoming an angel investor would mean that you can really make one’s dream a reality. When entrepreneurs have exhausted money from friends and family, personal savings, bank loans, and credit cards for their startups, they may seek angel investors to help them fill their needed equity gap. According to studies, nearly 2/3 of funding for new enterprises is obtained from angel investors. Therefore, angel investor capital can provide a great source of funding for new businesses that have a high potential for growth.
Flexible Business Agreements
Becoming an angel investor can yield the most flexible business agreement, and you can always get the better end off of a startup business. Angel investors have a more informal investment criteria compared to the traditional financial lenders, including banks and venture capitalists. Since they are investing their own money, their business deals can often be negotiable. Because of this flexibility, they are more likely to be excellent sources of capital for early-stage businesses.
Raising Capital Continuously
Most early-stage ventures require small amounts of money, typically less than $500,000. Angel investors can provide this needed amount by using their own personal funds for the investment. This really gives a lot of mileage for startup businessmen because of the higher potential for more capital. Venture capitalists, on the other hand, typically pool money from different sources, generally invest in later-stage companies that have already established stability and success, and invest in enterprises in need of at least $500,000 to $1 million.
Getting Rid of High Monthly Fees
Another benefit from raising an angel capital is that there are no outstanding payment rates such as the ones that bank loans and credit cards require. Many entrepreneurs enjoy this element of angel investors, concentrating their time and effort into taking their new business forward rather than worrying about high monthly payments and fees that traditional lenders enforce. It’s like you’re passively gaining the income while getting rid of that extra hassle of outstanding fees.
High Risk, But Definitely High Rewards
You can consider this as either a pro or a con. Angel investing is definitely a high-risk maneuver, but surely a highly rewarding experience. An angel investor’s capital in a new business is considered to be a high-risk investment since the new company has not yet established a solid track record of success. Since they often provide the initial funding for a new company, it can be quite difficult to determine if their invested enterprise can become successful in the long run. Despite the fact that most new businesses fail in their initial years, angel investors tend to be quite optimistic about their investment choices and often request a large amount of returns to counterbalance the risk.
Providing Money That’s Not a Loan
As you take out your small business loan, your bank expects you to repay it, whether the venture succeeds or not. As an Angel investor, you operate inside a different framework. You offer the capital needed to get the ball rolling. The startup businessman would definitely feel blessed because of your existence, especially when most banks would decline him off a business loan. Surely, if the startup takes off, both parties reap the financial rewards. Then again, this might also be considered a con: while providing lesser headaches for the startup businessman, essentially giving away your money without definite collateral might fire back at you when the company falls flat.
Helping Others, Especially the Community
Many angel investors choose to invest locally – therefore, as an angel investor, you are extending your help to someone as they grow inside the community. The capital investment that Angel investors provide for a new business not only assists the launch of a new enterprise, but also helps create employment opportunities and stimulate economic growth by encouraging consumers to purchase their products. Many angel investors take pride in using their expertise in giving back to their community. These are the angel investors who look beyond monetary return.
Anonymity can either be good or bad for Angel investors. While there are well-documented directories of venture capital firms available, there is no national register for angel investors. Due to these differences, angel investors do not have the national recognition as their venture capitalist counterparts. They remain hidden and mysterious but choose to do so in order to have a degree of separation from entrepreneurs who may pester them with their business plans and telephone calls.
Extremely High Risk
Like mentioned before, becoming an Angel investor is a very high risk. Sure enough, you can gain a good amount of control to the business venture, but oftentimes, this wouldn’t be enough to necessarily steer the startup venture in the right manner. Also, the business enterprise could easily fail because you’re making a deal with startups. While everybody has to start from somewhere, not all startup entrepreneurs are good, and they can even be too ambitious for their own good. The high risk of becoming an angel investor may easily be rewarded with results, but they are risks nonetheless.
Becoming an Angel Investor is Quite Costly
In exchange for providing the needed startup capital for a new company, many angel investors often require a certain percentage of stake in a company, starting at 10% or more, and expect a large ROI for their exit. However, as mentioned earlier, becoming an angel investor requires a huge amount of investment with no return in a short amount of time.