An angel investor is an individual that has faith in you and your business. And it doesn’t matter if the angel investor sees great profit potential – which differentiates angels from venture capitalists – they will give you money to help your business take those extra steps towards stability and development.
Angel investors can be anyone who decides to contribute to your business financially. Your boss from your old job could be an angel investor; your doctor could too, or your wealthy close friend, or even a total stranger that found out about your company and wants to take a gamble on its success. Like a guardian angel, this investor just wants to use the resources available to them to help you progress.
Of course, this sounds like a great thing to have, especially if you don’t have a lot of money to start your business – but what’s the catch? Is there one? What are the pros and cons of accepting the generosity of an angel investor?
Let’s take a look.
Angel Investors with Benefits
If your company is beyond the early-stage startup level and needs more capital to move even further along, this is where an angel investor can really help you out. Capital that you would otherwise not be able to get right away could help you open your first store or manufacture enough products to increase sales.
An angel investor is usually someone who’s been successful in the business world on their own; they have a lot of experience that you can absorb like a sponge. Essentially, they can become a guide for you: they can help advise on a variety of situations, strategize to generate more income, help devise clever marketing campaigns, and more … because they’ve been around for a while and know what works.
These are great reasons to accept the help of an angel investor. An angel could be just the thing your company needs to push forward.
But, again – what’s the catch?
Drawbacks of Taking on Angel Investors
Angel investors might be an excellent source of business advice, but you really need to make sure you know what you’re getting into before you accept anyone’s financial help.
Primarily, by allowing an angel investor to partake in your company’s growth, you’re allowing them to not only have a say in the way your company is run, you are most likely going to be giving them a share (i.e., equity) of your business. You never know how much they might ask for: it could be 10 percent, 50 percent, or sometimes even more than that! So, you need to be certain that you’re ready to give them that much power over the company you’ve started, if that’s what they ask for in return for their financial support.
An angel investor might not be so benign, either. If they’re investing a lot of money in your company they will want to make sure they’re not going to lose their investment, and this could mean being ruthless in order to get what they want.
One investment horror story I saw firsthand while working for Australian pet food company, Royal Canin. Once the company had accepted investment from angel investors, all of a sudden, the pressure to perform and hit short term goals was immense.
If your company is growing, but you don’t seem to be helping it move along; or if your business practices are hindering it and you’re not getting along with your angel investor, then if they have predominant influence, they could view you as a liability and fire you. Of course that depends on how much equity you’ve doled out … or how much generosity you’ve decided to accept, but if you dive headfirst without reading the fine print, you could be giving away your entire venture.
It may seem that the cons outweigh the pros, but that’s not always the case. It really depends on the angel investor in question, what their intentions are, what your relationship with them is like, and whether or not you can trust them. The best thing you can do is talk to different angel investors that are interested in helping your business grow and work out an agreement that satisfies both parties.
If you’re smart about who you let invest in your company you could end up getting that extra lift you need to make your idea a huge success.
This article has been edited and condensed.
Simon Crompton is a freelance journalist and entrepreneur, who spends the majority of his time blogging about business startups and consulting on web development. He has launched multiple online companies. He is also a dedicated follower of fashion, and has written for the Financial Times and GQ. Connect with @PermanentStle on Twitter.
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