In the startup sequence of a business, the lack of working capital might pose the biggest threat to its development.
It is a well-known fact that in the first five years or so of any company, profit might be out of the question.
Simply put, it’s survival by excellence.
Evidently, many business owners rely on loans to bring their companies to the next levels, when they transform from “money-wasters” to “money-makers”.
However, in recent years, banks have lost their influence on these business owners. Instead, the latter tends to turn to angel investors.
If you’re just starting your business and you’re in pursuit of working capital, then you might want to consider these seed investors.
Before we take a look at the pros and cons of working with them, here’s a brief introduction to the identity of “angel investors”.
What is an angel investor?
A business angel or angel investor is a private lender specialized in providing capital for young companies.
Usually, the debtors don’t need to pay the money back. Angel investors accept bonds and equities as a repayment.
Consequently, angel investors are much more pleasant to work with than banks, who are all about getting every dime back on top of their exorbitant interest fees.
That being said, we ought to jump straight into the inside scoop.
The pros of getting funded by an Angel Investor
1. An angel investor is a risk-taker
You must understand that angel investors are businessmen.
Because of that, they know when a company is worth the funding or not.
If your business has enough potential – even if you don’t see it at the moment – the angel investor will certainly know.
Banks are less keen on providing capital to individuals that might or might not make it in the market.
An angel investor basically knows when his investment will be fructuous and when it won’t.
2. You won’t be in debt
That is, not in the literal meaning of “debt”.
Since angel investors usually accept being repaid in shares, bonds or equity, you won’t need to lose sleep at night thinking how you’ll muster up the money to pay the investor.
This is without a doubt one of the greatest perks of getting funding from this type of investor. It removes the risk of defaulting and losing precious collateral to foreclosure.
3. He has valuable expertise
You should consider an angel investor your business partner and consultant.
Thanks to their experience in the field for years, they know what it takes for a business to become successful.
Your business will grow before you know it.
Of course, not all investors are 100 per cent professionals and infallible entrepreneurs, but most of them are. You just have to find one that fulfills these criteria.
The cons of getting funded by an angel investor
Even though at first glance it’s all sunshine and rainbows, accepting funding from an angel investor also has some downsides.
These are less likely to turn into anything serious if you keep your eyes peeled, so caution is highly advised.
1. You might lose some control over your company
Buckle up for the harsh truth: angel investors do not invest in start-ups unless there’s an incentive for them.
In some cases, they will invest in your company only if you agree to let them make some of the decisions, like in leadership or finance.
Many business owners do not agree to that. If you are willing to let an investor play an active role in your company, then funding is an arms reach away.
Moreover, even when the angel investor doesn’t want to become a co-leader, he might still ask you why you’ve taken certain decisions.
2. He might want more than he invested
This is utterly unacceptable, but it doesn’t change the fact that it does happen.
Angel investors are focused on profit. If your business takes off, your investor could try getting his hands on more money than he put into your company, to begin with.
If this happens, you’ll have a problem that you might need to take to the court to solve.
3. Once your company develops, he’ll get some of your earnings
This is one of those strings attached to the investment of the business angel. Again, you don’t need to pay him back in physical money, like you would a loan.
However, some of your money will get to him anyway.
It’s his right as an investor and you can’t stop it. This can slow down the development of your company when you least expect it.
Some Important Precautions
A new growing brand in India MR10 stated in a discussion that “In order to stay away from trouble, you should take some precautionary measures.
For instance, when you first talk to the investor, make sure your business will be as successful as he expects it to. This will shield you from not satisfying him.”
Moreover – and memorize this – do some calculations and see whether or not he’ll get more money than you do at the end of the day, especially if he will have some form of ownership over your company.
Also, do not get funding from an angel investor if you are not down with the idea that he will have a word to say in your company. Most people refuse an angel investor’s help altogether because of this, and honestly, good for them.
Angel investors are quite dyadic investors, in the sense that, on one hand, they provide funding easier than banks do, but on the other hand, their help usually has too many strings attached to be entirely beneficial.
If you cannot get funding from another institution, you are justified to talk to a business angel.
Just make sure you take a look at those precautions again, so you won’t end up regretting your decision.
You should not give up too easily on the importance of your own word because, after all, it’s your company, not the investors.
We hope this cleared out any issues you might’ve had with the feasibility of angel investors.
Image Credits: samuraitop
e27 publishes relevant guest contributions from the community. Share your honest opinions and expert knowledge by submitting your content here.