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Investing

Angel investors: the must-know pros and cons

Ronen Menipaz

Ronen Menipaz

17.10.2019

Any startup founder and entrepreneur looking to further the early stage of their business will inevitably look at the direction of angel investors. For many, these are the people and funds that will ultimately make all the difference if the business ever gets off the ground. 

That makes it all the more important to have a list of angel investor pros and cons nearby in order to fully understand what both sides need and get from the deal. Something like…

Higher risk tolerance equals higher expectations

The first thing you’ll hear about any angel investor is their flexibility and fearlessness to take risks. In a post writing about different types of investors, I labeled angel investors as “wealthy individuals who want to invest in projects they are passionate about” and are usually successful entrepreneurs themselves. Because of their background, they know a good investment opportunity when they see one and have the necessary understanding of the risk involved, as well as the potential. 

In a yin and yang-like situation, providing the initial funding for a new company means there will be numerous trade-offs. For starters, be prepared for high expectations in terms of a payoff. It’s not an atypical scenario for an angel investor to expect a return multiple times higher than the initial investment in the first few years. 

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But in a nicer way.

Also, you will likely be under a watchful eye all the time and held accountable for your every decision. Hence, the pressure to deliver on your promise builds exponentially, even if there is no immediate interest. Be prepared to do quite a bit of explaining about the choices you make.

Benefits come with strings attached

The good news is that the funding you receive doesn’t come with a repayment plan of sorts. Unlike more traditional forms of financing like banks, you’ll be operating within a different framework. If the company gets sold, both sides reap the benefits but if things take a turn for the worse, technically there is no debt to hold you down.

The bad news is that this leads to one of the primary disadvantages of angel investors: the loss of complete control as an owner. The money you need to get going buys them an ownership stake in the startup.  In other words, you’ll be limiting your future profits by giving away the ownership stake later in exchange for the funding now. The potential profits of getting invested should be worth the sacrifice later on.

If you’ve been occasionally eyeing this blog, you might have noticed something I like to call the entrepreneurial tragedy. It’s the tragic and unavoidable part of entrepreneurial ventures wherein you surrender a part of your idea/company for long term success. This is a decision that shouldn’t be taken lightly. Being an entrepreneur means doing things your way, and with an angel investor in the picture, that ship will potentially sail (I say potentially because in some cases angel investors don’t take a board seat, eliminating the tragedy at hand). 

You get a little extra something besides money

No list of angel investor pros and cons is credible without mentioning what they bring to the table besides money. In many cases, an angel investor’s role is to be a mentor and provide invaluable advice about their own experiences, and generally share knowledge. These are angel investor qualities that will particularly appeal to first-time business owners, entrepreneurs with little to no experience or those entering a vertical the investor has experience in. I guess that’s part of the reason why an angel investor is also sometimes called a business angel – for their ability to look over a business, in a way. 

In some cases, this also includes providing access to connections to accelerate the development of a startup. However, not all angel investors have the same involvement levels. Some will stay on the sidelines while the majority will have a very hands-on approach, which can be bad sometimes. Some may exert influence on you or show a desire to control certain aspects of your business you are not willing to concede yet. 

The point is, you’ll be dealing with an individual that may or may not be easy to work with. More importantly, he/she may not see eye to eye with you on critical matters or worse, won’t have the company’s best interests at heart because they can for example be impatient, have different intentions, and/or seek a quick payoff. 

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They are available but typically in a limited capacity

By that, I mean two things. First, the odds are high that you’ll find an investment you need, especially on a local level because a large part of angel investing is local or regional. It’s not an exaggeration to say they are everywhere as most industries have active angel investors. Along with their specialty of investing in startups, this makes them often the first and foremost investors.

On the other hand, they are not banks and generally make only one investment in the company with no follow-ups. You have to understand there’s a limit to investing in high-risk scenarios, especially since this is an investment of time on their side, not just money. That being said, it may take you time to find a suitable angel investor – one whose motivations and plans closely align with your own. 

Being in charge of an investment company, one other thing I can tell you is that angel investors have a considerably smaller amount of structural support. While this isn’t necessary for startup founders and entrepreneurs to succeed, it certainly makes it easier for some who need all the help they can get..  

If the price is right, angel investors are worth it

There are different angel investor types and they all have their agendas and modus operandi. Whether your startup is at or beyond the seed stages of financing (but not yet ready for bigger investments), the right partnership can work wonders for both your business and the angel investor. It can move the needle toward financial sustainability but only if you don’t sell yourself short. 

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Hence, the last bit of advice I can give is the one any savvy investor will give: do your due diligence on the angel investor the way they will do on you. A lot of hassle and worry can be avoided with some proactive planning and strategizing. For both sides.

Image credits:

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