Startups face a lot of challenges. One of the most important challenges, at least in terms of being successful, is securing enough funding to fulfill their potential.
The hard facts are that around 90% of all startups fail within the first year of being in business, and the most common reason for this is a lack of funding.
The issue is that traditional funding like bank loans and business loans are not often available to startups as there is no history of turning profits. If they are, the repayments can be crippling and slow down growth as much as funding it.
What is angel investing?
Angel investing is a type of private investment that any business can seek. The investment is made by Angel Investors, who are typically high net wealth individuals looking to invest in companies.
Angel investors tend to invest in startups, small businesses, and entrepreneurs. They look for opportunities to buy equity in companies where they see the potential for a lot of growth.
They seek these types of investments to make money, as it’s an investment, but also to diversify their portfolio and invest in a business where they can make a difference.
It’s designed to be a win-win for a startup and an angel investor. The startup gets funds with no steep repayment plans, and the investor gets equity in an early-stage business with the potential for large gains as the company grows.
Here is a closer look at the main benefits and disadvantages of angel investments:
Benefits of taking angel investment
To summarise, some of the benefits for a startup taking angel investment are:
Quick decisions – Angel investors can make quick decisions and usually make the funds available very quickly. This can prove to be a lifesaver for some businesses in need of cash to carry on operating.
Expertise and experience – Angel investors often pick industries they know well and have some expertise in. This is so they feel more comfortable with their investment and are able to offer their knowledge to help the business prosper.
No repayments or interest – Angel investors buy equity in a business, they do not loan money with repayment terms. This gives startups a lot more time and freedom to use the funds on growing the business.
No need for collateral – For a lot of financing options businesses need to put up collateral to secure the funds. This is not necessary when receiving funds from an angel investor, neither is showing a track record of turning over profits.
Disadvantages of taking angel investment
Angel investing doesn’t align with what every business wants. The ‘disadvantages’ for some businesses are:
Not always easy to find an investor – It’s not always easy, or even possible for some businesses to find a suitable angel investor. Negotiating is also required, which can be difficult without support or experience.
Giving up a share of the business – Not all startups want to give away equity or a share of the business. If this is the case, angel investing is not an option.
Less formal and structural support – Angel investors are individuals, and as such do not have the structure and some of the due diligence processes traditional financial institutes have.
Harder to find large investments – Angel investors typically lend small to medium amounts, and may even ask to do so in installments. It’s not the best form of financing for startups looking for a substantial investment.