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Pros and Cons of Using an Angel Investor to Fund a Startup

If you have not been successful in your efforts to secure funding for your latest business venture, an angel investor might be your answer. An angel investor specializes in offering financial backing for the small-business owner and entrepreneur within your startup stage and beyond. As the funds they bring to the table may make all the difference in whether your concept ever gets off the ground, there are a few trade-offs you must be alert to. Cons and Pros of Using an Angel Investor

Pro: An Angel Investor is willing to take a Risk

Being eligible for a small-business loan typically entails hopping through a few hoops — challenges you might not be faced with while dealing with the angel investor. This is because these, "angels," are often established entrepreneurs themselves, who comprehend the level of involved risk and are at ease with taking it on. Even if the bank agrees to offering you the funds, they might restrict the quantity you’re able to borrow to curb the possibility for their loss. On the other hand, angel investors usually do not balk at making a bigger investment if they believe in the organization’s potential. An angel investor can usually, "smell," a good idea and a good deal.

Con: An Angel Investor Might Set the Bar Higher

The disadvantage of the angel investor’s higher tolerance for risk is that also they usually have higher expectations. They are in business to earn money, and as there is a significant quantity of funds on the line, they are going to want to witness a payoff, just like anyone else is. It isn’t unusual for an angel investor to expect a rate of return that equals 10 times their original investment inside the first 5 – 7 years. When you are being held to this type of standard, the pressure to generate may be intense. If you are considering angel investors, you must determine whether the startup is within a position to expand at the rate the investor expects.

Pro: Money is not a Loan

As you take out your small business loan, your bank will expect you to repay it, irrespective of whether the venture actually succeeds. An angel investor operates inside a different framework. They’ll offer you the capital needed to get the ball rolling, and in exchange, they receive an ownership stake in your company. If the startup takes off, you’ll both reap the financial rewards. If your company falls flat, on the other hand, an angel investor won’t expect you to pay back the offered funds.

Con: There will be Strings Attached

Though you aren’t officially obligated to pay back your investor the capital they offer, there is a catch. As you hand equity over in your business as a portion of the deal, you essentially are giving away a portion of your future net earnings. The percentage of ownership the angel investor requests usually depends on how much they are investing. If you expect the startup to be extremely successful, it might add up to lots of money you will not have the ability to lay claim to. As you have an offer on the table, carefully assess the terms to ensure the quantity of ownership the investor is asking for does not eat into your own capability of realizing a profit.

Pro: Odds of Success Rise

Angel investors typically bring years of expertise to the table of a start up and they already understand the ropes it’ll take to bring success to your starting a business. Scientists from the Harvard Business School discovered that ventures backed by angel investors are more likely to remain in business longer, have substantial growth, and witness a greater rate of return. If you are seeking guidance and advice in addition to funding, angel investors offer a plethora of precious knowledge.

Con: You Aren’t in Full Control

An angel investor won’t shell out the big bucks without taking an interest in how the funds are used. If you are expecting them to take a hands-off approach, you might be in for a rude awakening. It is more likely that the angel is going to want to take an active part in making decisions which affect your organization’s outcome. Even if they give you control, you will still be accountable for explaining the reasons behind some of your decisions. Prior to starting to look for your angel investor, you must ensure that you are at ease with permitting somebody who isn’t intimately familiar with you or your business to play a role in how it is run.