Are angel investors the right funding source for your startup or small business?
If an influx of cash is just what your business needs to expand, angel investors (or angels for short) are one option that doesn't require you to borrow money. Although financing that you don't need to pay back can be beneficial, there's still no such thing as a free lunch. Like any type of funding, angels have their pros and cons.
Funding in exchange for shares of your business
How angels work is simple – they invest into your business and receive shares for their money. The typical amount is $25,000 to $100,000, although it could be much higher depending on your business, its industry and the growth potential. It's generally less than what you'd get from a venture capital firm, but this also means angels are a better option for small businesses that don't need millions to grow.
An obvious advantage of angel investors is that you're not expected to repay the investment, cutting down on your risk. In a worst-case scenario where your business goes under, you won't be out that money or need to pay anything back like you would with a loan.
You can raise far more money through angels than you could through saving alone, making this funding method ideal for taking the next step with your business. Apple and Amazon are two of the major companies that owe much of their success to funding from angel investors.
Giving up a portion of your business isn't something to take lightly, though. Angels typically require a solid amount of equity in your company. Make sure that the potential profits of expanding are worth what you'll be sacrificing later.
Receiving funding from angel investors
Since angels are individual investors, receiving funding from them is much different than getting a loan from a financial institution. You need to put together a pitch and convince them that your business will bring the kind of return they want.
The challenge isn't finding potential investors, as there are many means available to do so, such as online networks that connect angels with business owners. The challenge is to demonstrate why they should fund your business. On the bright side, angels are more open to risk than your typical bank.
Even if you're successful, the entire funding process could take several weeks or longer from when you first reach out to potential investors to when you receive the money. That's not unique among business financing, as loans can take just as long. If you need a quick jump-start for your business and are looking to get ahold of some of the essentials – like equipment, office supplies, furniture, and so on – low-interest credit cards are a solid and quick solution. With a good credit history, you could acquire up to $50,000 with APR rates at about 10 to 11 percent. Credit cards like these are something to keep in mind if time is a factor.
Angel involvement can be a double-edged sword
Although angels can't force you into any business decisions, they may try to exert influence on you. It depends on the investor, as some are very hands-on, while others prefer to stay on the sidelines.
Angel involvement isn't necessarily a bad thing. An angel who has experience in your industry could help you along the way by providing valuable guidance and access to their connections. Your relationship with your investors will largely make the difference in whether they help you accomplish your goals or drive you up a wall.
One guarantee when angels get involved in your business is that they'll have expectations regarding business growth. For their investment to be worthwhile, your business must increase significantly in value, and that can lead to quite a bit of pressure on your shoulders.
When you're pitching to angels, don't solely focus on convincing them to work with you. Consider if you want to work with them and what they bring to the table besides their money. If you don't want anyone suggesting how to run your business, make sure you find angels who take a hands-off approach.
Making the call on angel investors
Here are two questions you should ask yourself before signing on the dotted line with any angels:
- Is the money and potential growth in profits worth the equity I am giving up?
- Are we are a good match?
Angel investments may be exactly what you need to grow your business but resist the temptation to accept an offer for the dollar signs alone. If you can get an offer from one angel, you can get offers from more. Be patient and wait for one from the right angel (or angels) that is also a fair trade in terms of equity.