Angel Investors: Role & Function in Startups

If you’re the owner of a fledgling startup business that you’re doing your best to get off the ground, then the chances are that you’re looking into a wide range of different funding sources that can help you get operations going. You’ve probably heard a lot about venture capital and the vast array of benefits that venture capital firms or investors can provide. Still, you should also consider looking into angel investors as well.

The article below intends to explore the critical roles and functions that angel investors can play in supporting your startup, especially at the beginning when revenue flow is a trickle at best. Please continue to learn the essential basics of what you need to know regarding angel investors to see if they can help provide the solutions you’re looking for.

Related: 5 Best Startup Funding Sources

What are Angel Investors, and What do They do?

An angel investor (also sometimes called an angel funder, seed investor, or private investor) is an individual with a high net worth who provides financial backing to startups, small businesses, and entrepreneurs. Generally, this assistance is provided in exchange for a part of ownership equity in the startup company. Angel investors are most typically found among an entrepreneur’s friends or family. Though many also provide funding to startups that they have no prior connection to, as long as they appear to have long-term growth (LTG) potential and operator within a specific niche or industry.

The funds that an angel investor provides to a startup may be a one-time investment to help get operations off the ground or might be an ongoing injection of funds into the business to help carry the startup through the difficulties it may face during its earliest stages. Additionally, angel investing is often a primary funding source for many startups, which startup founders strongly prefer because angel investors operate in a much less predatory way than other funding providers.

That said, these types of investments are relatively risky, especially to angel investors themselves- because there is no guarantee that the startup they fund will manage to find financial success. Because of this, said investments don’t typically represent any more than 10% of an angel inverter’s investment portfolio.

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What are The Pros and Cons of Funding From Angel Investors?

Like any form of funding, money obtained by a startup from an angel investor comes with a range of distinct pros and cons that founders should consider before requesting or accepting any of said funding. Again, angel investors provide financing using much less predatory methods than other funding providers, but that doesn’t mean the money they provide doesn’t have any strings attached. Below are some of the primary

Related: Startups Can Get $250,000 From The IRS: Here’s How

Pros

  1. Angel investors are usually more willing to take risks by investing in startups or small businesses that other more prominent institutional investors or venture capitalists may not be as willing to fund. This is especially beneficial for those developing startups within small industries or niche interest areas.
  2. The money that angel investors provide isn’t a loan that’s expected to be repaid. Instead of eventually returning the money (with interest), as you would for a bank loan, an angel investor receives partial ownership in the company. If your startup becomes successful and takes off, you and the angel investor will see financial benefits. However, if your startup fails, the angel investor won’t expect you to pay them back. They’re essentially gambling on you to succeed.
  3. Angel investors often don’t just provide financial assistance to startups and small businesses. They also tend to bring expertise and years of experience to the table. Because of all these factors, startups who receive help from angel investors are much more likely to succeed and stay in operation longer compared to startups who don’t work with angel investors.

Cons

  1.  as much as ten times higher than their original investment after only 5-7 years of operation.
  2. Again, even though angel investors aren’t as predatory as other finance providers, their money does come with a range of strings attached to the deal. They will technically own a portion of your company, and their percentage of ownership will largely depend on how much funding they provide. If they offer a lot of funding, they’ll officially own a lot of your business.
  3. Just because angel investors provide your startup with funding doesn’t mean you have total control over what you can spend said funding on. Many angel investors prefer to take an active role in deciding what their funding is put towards. But even if they do give you complete control over the funds, they’ll likely expect a thorough explanation behind the reasons for your spending.

Related: Business Startup Costs & Tax Deductions

Where Can You Find Angel Investors for Your Startup?

You may wonder, “How do I get an angel investor for my startup?” The best way is to research online to find an angel investor. 

There are plenty of websites that’ll do the networking for you. Below is a list of websites you can use to find an angel investor.

You can also use social media platforms to find angel investors in your area. For example, on FaceBook, go to the search bar and type in angel investors. 

You can then find a list of investors within your area. If not, try narrowing down your results by going to the marketplace or pages category to see what pops up. 

Another option is to attend networking events within your area. So, be sure to research your community or nearby cities where different businesses can meet up for networking.

Lastly, you can ask friends or family if they know anyone willing to invest in your startup company. You never know; they may be able to connect you to an angel investor who is helping you to start your business.

Angel Investors Invest How Much in Startups?

When it comes to the amount an angel investor will invest in a startup company will depend on several factors. One of these factors is how long the startup company has been around. If the startup company has been around for a year or more, the angel investor may invest more depending on the profits.

Another factor is if the angel investor really believes the company’s owner has a good business idea going for them. If they think the company will flop in the long run, the angel investor may invest a small amount.

Typically, an angel investor will invest between $15,000 to $250,000. Investment amounts will depend on how well your business is presented, whether they believe in you, and how well your business plan is developed.

This makes it even more essential to develop a well-detailed business plan. Your plan can be the deciding factor if an angel investor will invest in your dreams or not. 

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What Do Angel Investors Get in Return?

If an angel investor was to invest in your startup company, what would you have to give them in return for doing this? Typically, an angel investor will want some ownership of the company. 

Angel investors typically provide capital in exchange for stock or convertible debt. Also, investors prefer startups that can generate several times their initial investment. There are many risks associated with startup investments, so the return on investment should be sufficient to offset those risks.

Are Angel Investors a Good Idea?

Generally, angel investors prefer to invest in startups and early-stage businesses with growth potential. As a result, your business should be able to rapidly boost its sales in the coming years without incurring high fixed costs. 

Bringing an experienced investor on board could be wise if you believe your business will succeed in less than five years. So before you search for an angel investor, ensure your business will generate more sales than fixed costs and expenses.

Final Considerations to Keep in Mind

Alongside other providers of critical startup funding like venture capitalists, angel investors can be a near-literal saving grace that offer newly developed businesses the ability to get themselves off the ground and start earning a profit within the open market. If you’ve decided that angel investing is the solution for all of your startup financial woes, please consider finding angel investors operating within your business’s industry and reach out to learn more about what they can do for you.

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