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If you’re in the early stages of beginning your start-up business, seeking funding from a business angel is a great way to get financing without borrowing a loan. Working with business angels also allows you to gain access to their mentorship and knowledge, which is critical in a business’s early stages. Knowing both the advantages and disadvantages of seeking funding from business angels can help you decide whether this route of funding is ideal for you and your business.
In this article, we’ll discuss what business angels are, along with their primary advantages and disadvantages.
A business angel is a high net-worth individual who offers financing for small start-ups or small business owners, often in exchange for equity in the business. The funding a business angel provides might be a one-time investment, or it may be an ongoing financing venture to help the new business in its early years.
Business angels are always looking for ways to make more profit from their money than they would get if they invested it in the stock market. However, it’s imperative to note that the interest of angel investors typically goes beyond just financial return. They might be interested in mentoring a new generation of entrepreneurs, working within a particular industry, or leveraging their experience and skills differently.
Business angels include family and friends, wealthy people, crowdfunding, or groups of investors with a common interest. In Europe, there are approximately 300,000 active angel investors, out of which 18,000 are part of the Business Angel network.
When compared to alternative forms of business funding, business angels are typically negotiable because they invest from their own money. Often, many angel investors are successful businesspeople who have cashed out and know the amount of risk involved in creating a business. This risk-taking ability and flexibility make business angels one of the best sources of capital for start-ups.
Unlike banks, business angels fund businesses or entrepreneurs with the money they need to get going, getting an ownership stake in the company in return. Typically, this ownership stake starts at about 10%. If your business start-up thrives, both you and the angel investor will reap benefits. However, if your business fails, business angels don’t get paid back.
Because most angel investors are seasoned investors, they provide expert support, contacts, and guidance that can help your business skyrocket. Their experience, insight, and resources can be of significant value for your business’s growth.
One of the best things about business angels is that you can find them everywhere. Many groups of business angels across the globe meet frequently to access local opportunities that might be available.
Although business angels make it possible for new business owners to get their businesses up and running in the early stages, there are disadvantages to seeking funding this way. The primary disadvantage of the business angel funding model is that business owners commonly give away between 10% and 50% of their business start-up in exchange for capital.
After investing their money in a business start-up, most business angels take a proactive approach to running the business. For instance, experienced business angels often like to have an exit strategy in case the business venture fails, such as selling the business to a larger company or making the business public. So, they may encourage you to sell your start-up before you’re ready. Also, if you give away too much equity to business angels, they may choose to hire a more experienced executive, potentially removing you from the company you created.
With higher risk tolerance, comes higher expectations. Since business angels are in business to make money, they expect to see a substantial return on their investment. Business angels often expect a significant return on their investment, which is equal to ten times their initial investment within five to six years. Before accepting funding from business angels, it’s essential to evaluate whether your company can grow at the rate that an angel investor expects and determine expectations for growth.
While business angel investments have many advantages, such as flexibility, no interest or repayment requirements, and an extensive pool of knowledge and resources, this model also has its disadvantages. These can be the loss of control over your business, along with higher expectations and pressures to grow the company. If you’re facing any of these issues, it’s best to consider help from a law firm for business startups.
So, it’s essential for any business owner thinking about accepting angel funding to be clear about what the business angel is bringing to the table besides the money, access to good suppliers, or expertise in business operations. Also, it’s imperative to have a thorough understanding of what the angel investor is like to work with because they might have conflicting ideas about how your company should operate.
For further reading, check out our other articles like Understanding an anti-embarrassment clause and Do small businesses have to pay redundancy payments in the UK.
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