Who is an angel investor?
An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.
Angel investors are helpful to start-ups and entrepreneurs who are not wealthy and who do not have the track record that allows formal financial institutions to give them access to credit or loans. The objective of this supporter (angel investor) is to get a business to a level where it needs to be to attract venture capital, from a place of being self-funded.
One big advantage of working with angel investors is that financing from angel investments is much less risky than debt financing. Unlike a loan, invested capital does not have to be paid back in the event of business failure or with stringent and specific payback timelines like financial institutions’ loans. Most angel investors choose businesses they understand very well, and bet their investments again the future success of the business, given the character of the individuals involved. They also take a long-term view of what future success looks like for the company, based on the assumption that less than 30% of their start-up portfolio have very high chances of great success while the remaining 70% are doomed to eventually fail.
The primary disadvantage of using angel investors’ money, which comes from assessing the investment decision from their perspective, is that they do take huge and crazy risks, so this results in the company founders eventually releasing some control to the angel investor, as a result of the investment they make. Though this is a disadvantage, it also helps founders by adding experienced people to the firm, which then helps to steer the business, and make decisions. This, however, might again result in hijacking the initial founders’ vision.
Who makes the decision?
Using angel investing money is a deliberate decision a founder has to make. Founders should never accept or take on board an angel investor for the sake of the investment alone, but rather they must also aim to make sure that the investor is compatible with the team. The firm must also be able to benefit from the angel investor’s industry experience, network, and other resources at the angel investor’s disposal. So it is the role of the founders to look for angel investors but it is also their role to do so with the necessary due diligence because if an angel investor gives a company money, takes that control and goes dormant after a few weeks, it means the company is likely to be stuck and waste time and energy following up with that investor, rather than doing what they should be doing; setting up and to grow the business.