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Angel investors: are they a bad idea for starting a small business?

Angel investors: are they a bad idea for starting a small business?
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Small businesses often require external funding at various stages of their development. The good news is that there is currently a wide array of potential sources of funding available. One of these is angel investors.

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Here’s a quick overview of what angel investors are, how they work, where to find them and if they are a good idea for new and existing small businesses.

Who are angel investors?

Angel investors are high net worth individuals who invest their own cash into a business in return for equity. This is most often during the startup phase, when other investors might not have the confidence to invest in these businesses.

Most are successful entrepreneurs, investors, bankers, senior executives, athletes, artists, movie stars etc.

The angel capital market is relatively big in the UK. For example, according to Oxford Economics, in 2018 alone, about 21,200 small enterprises were using business angel and/or venture capital finance with a combined turnover of £36.5bn.

Digital, biotech and financial services firms stand out as the most intensive users of angel investors in the UK.

How do they work?

The terms of engagement vary from one angel investor to the next. For example, one may offer a one-time cash investment. Another may provide continual funding during several stages of startup.

In addition, angel investors range from those that take a passive approach to investment (backing the judgments of a small business owner) to those who are more hands-on (providing advice and even direct management input).

A lot of angel investors tend to have experience in the industry that they are investing in. As a result, in addition to financial support, they can provide much-needed mentorship to a business trying to break into the industry.

How do you find them?

The process of finding the right angel investor for your business venture is not straightforward. However, there are several sources where you might be able to find them:

  • Networking at investment forums, entrepreneurial events, etc.
  • Matching sites on the internet (e.g. the Angel Investment Network)
  • Referrals from lawyers, accountants, investment advisers
  • Business competitions
  • Referrals from commercial banks – Your bank has an obvious interest in your growth and success as a company and may connect you with high net worth individuals interested in participating in your company as angel investors
  • Business journals

What do angel investors look out for?

No two angel investors are the same, and the things they look out for are different. But one thing that unites investors is passion – the excitement with which an entrepreneur speaks about their company or idea.

Passion shows that you are absolutely committed to making a business dream a reality. Angel investors understand that passion creates innovation and fuels creativity, and for many, such a person or business is often worth taking a chance on.

Needless to say, you also need to demonstrate leadership qualities and open-mindedness.

No single person has all the answers or skills. Therefore, when seeking funding, it’s important to demonstrate that you are receptive to input and informed direction from others. The angel investor may very well end up being a mentor or an important business adviser.

What are the pros and cons of angel investors?

Pros

  • Most are experts in the industry your business is in and can provide invaluable mentorship or coaching
  • There are no high fees such as those involved in seeking funding from financial institutions
  • They have important industry connections that can help you gain traction and avoid pitfalls
  • The money is not a loan and does not have to be paid back in the event of business failure

Cons

  • You might have to sacrifice a large equity position because of the level of risk involved
  • It can be difficult to find the right angel
  • Most prefer to have a say in the running of the firm, which may force you to give up some degree of control
  • Not all angel investors have your best interests at heart, some might have self-serving motives for investment

Are angel investors the right option for your business?

Most angel investors prefer funding small amounts (up to six figures) needed to launch new businesses. Therefore, angel investing is most appropriate for ventures still in their idea phase.

If you are an existing firm looking for funding to help with expansion, it might be better to seek other financing options, such as personal loans or venture capital.

Also, if you’re not willing to give up some equity ownership and control of your company in exchange for financial support, it might be better to seek other funding options.

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