Who Are Angel Investors? The Disadvantages & Advantages.

Who Are Angel Investors?

Angel investors are usually wealthy professionals or serial entrepreneurs. They provide business funding, often to startups because of the potentially high rate of return.

Many businesses use angel investment funds to get started. In the US, for example, 41 percent of technology sector startups said angel investors helped them, while the average deal size was $350,000.

Angel investors can be found everywhere, not just in Silicon Valley. They invest in businesses whose products or market sectors they understand. They also look for a good business team – because sometimes the people are more important than the proposition.

Five Benefits Of Angel Funding

There are several advantages to angel investment compared with other types of business funding:

  1. Speed of approval Angel investors aren't weighed down by institutional investors, shareholders and board members. They tend to move quickly through the approval and due diligence stages.

  2. Access to experience If an angel investor is willing to fund your business, it probably means they know your market sector well. That knowledge can be useful to you – the angel investor can provide advice, not just money.

  3. Personal involvement The angel investor has a vested interest in your business's ongoing performance because they're investing their own money. They will try to help your business succeed.

  4. Cash access Angel funding can be given in a lump sum, which is great for quickly growing your business. Other forms of investment are more likely to be spread over time.

  5. Independence Angel investors don't usually want board seats or control of future funding. Most of them want a simpler structure, such as capital in exchange for equity. They tend to be more 'hands-off' than venture capital investors, giving you more independence.

Three Disadvantages Of Angel Funding

Angel investment isn't money for nothing – it's important to go into an angel funding deal with your eyes open. Be aware of the downsides:

  1. Loss of equity It's your business at the moment, but it won't be entirely yours if you get angel funding. The investor will want a chunk of your business in exchange for their money, and it might be a big chunk. Take independent advice to get an idea of what's reasonable and set your limits before negotiations begin.

  2. Loss of control Although you're unlikely to be sidelined as much as you could be with venture capital funding, you may still lose some control. In extreme cases you could even be fired at a later date by the angel investor. It all depends on how the deal is structured.