Angel Investors are wealthy separate who usually provide funding in exchange for ownership support in a start-up.

Pros And Cons Of Angel Funding

One of the ways to secure funding in your start-up is through angel investors. Angel Investors are wealthy separate who usually provide funding in exchange for ownership support in a start-up. Nowadays, with the vast amounts of start-up’s being underway, an angel investor being a financial advisor may act as a mentor for the growth of the business of the start-up. 

However, the investment an angel investor brings may be a turning point if the product launches in the market. Thus, a start-up founder should pay heed to the following:

Pro: Risky Business

Be it a loan from a bank, funds from an angel investor, an entity should be eligible for the same. Further, the eligibility criteria for angel investors don’t stop at the credit score of the founders, they invest in a start-up with a mindset to be in it for the long haul. 

However, angel investors being businessmen themselves, understand the risk involved by investing in the start-up and are willing to take it. If the angel investor understands the potential of the start-up and the commercial-ability of the offering, they do not hesitate with giving out bigger funding to the start-up.

Con: Higher Bar

The shortcoming of the investment in a risky business is that the Angel Investors have a higher bar set for the expectations from the start-up. The basic criterion for any investment is to earn money out of it, being the same for the angel investors. It is fairly common in cases that the return on investment is set at 10 times by angel investors within the first 7 years of a start-up.

This higher standard is bound to create stress. The founders should be certain about the amount of return on investment before taking on an Angel Investor.

Pro: No Loan

The funds provided by an angel investor don’t fall in the category of a loan or credit. An Angel Investor will invest only if they see potential in the business of the start-up. In exchange for the funding to the start-up, an angel investor is given a stake in the ownership of the start-up, preferably equity shares of the start-up. They are in the long haul with the start-up to reap higher benefits. However, if the start-up fails, it is not required to repay the amount of funding.

Con: Unpleasant Conditions

Even though, the start-up is not required to pay back the funding the founders should stay guarded. As the consideration in this deal to an angel investor is the equity in the start-up, which means that the future earnings are being given away. The amount of equity is directly proportional to the amount of investment an angel investor puts in.

Before accepting or even proposing an angel investor, the founder should evaluate the percentage of equity which even if given away, be beneficial to the founder.  

Pro: Higher Rate Of Success

Angel investors, with their expertise, bring a lot of experience to a start-up and have an understanding of how the business market works. Understandably, start-up’s being backed by angel investors shall remain in business for a longer period with a higher rate of success and rate of return. With an angel investor's abundance of knowledge, a start-up has a higher growth rate.

Con: Shared Control

An angel investor, will not stop at only providing the funds, but also participate to see if the funds are being used properly. Usually, Angel Investors want to take an active part in the decision-making process of the start-up’s which affect their outcome. 

However, even if an angel investor follows a hands-off approach, the founders may still be required to give the reasoning behind the decisions taken. Ultimately, before looking for an angel investor a founder should make sure that they are comfortable with a person not well aquatinted with the business to take a role in running it.

Edited By Team CLIQTAX

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