Building a business requires capital. You may be set with your own funds, or tapping into savings or credit, but another option for entrepreneurs is an angel investment.
The term, “angel investor,” coined by Professor Bill Wetzel of the University of New Hampshire in 1978, to describe early-stage investors, has gained a lot of cache over the past two decades. Angels invest their own money in a business with the hope of accelerating or kick-starting growth, and receiving a return. Research has found that angel-funded businesses succeed at a higher rate than those that have other financing, and angel investors fund more than 16 times as many companies as venture capitalists.
While it is difficult to track, according to a survey by the Center for Venture Research at the University of New Hampshire, the total U.S. angel market grew from $17.6B in 2009 to $24.1B in 2015, and the average investment that a business receives from an angel investor is $347,000.
There are various types of angel investors, and some are even accessible online.
- Individual angel investors who are personal contacts, friends, and former colleagues
- Online angel investors via accredited platforms such as AngelList, SeedInvest, and Portfolia
- Angel groups like Pipeline Angels, 37 Angels, and Astia
For entrepreneurs, the move to engage an investor is a serious one. It typically involves releasing some ownership stake, or a level of control in the direction of the company. On the plus side, a well-heeled and well-connected stakeholder might be just what the business needs to achieve additional success. In most situations, angels will integrate regulations into what the entrepreneur can do.
Consider these issues before working with an angel investor.
Reasons to welcome angel investment
- Money for your business to help minimize your own financial risk. Investors can likely contribute larger amounts of capital than you can personally generate from savings, cash flow and profits; therefore, helping you reach your goals faster than you would alone.
- Value to your business (beyond money). An investor wants to see your business succeed so they are likely to contribute expertise, connections and resources in addition to funds.
Reasons to be weary of outside investment
- Giving up equity, and, ultimately, control. Taking someone else’s money means you must repay them someday (many angel investors want 10x their original money within 5-7 years). An investor wants to be rewarded for their risk in the form of interest, dividends or increased share value. Make sure you are willing to share your profits.
- While you can retain majority control of your company with an angel investment, if you keep most of the shares, your investor(s) will nonetheless expect to weigh in on issues regarding strategy, profits, sales, expenses, and management decisions.
- Be sure your plans align with investor expectations. There may be pressure to one day sell your business so the investor can enjoy a substantial return.
Taking on an investor is an important decision. Be sure to consult with your accountant, lawyer, financial planner and any existing partners in order to obtain their advice.