Are Angel Investors Divine Interventions or are they Devils in Disguise?

You’re battling in vain for months now to get someone or somebody to buy into your groundbreaking business idea. Indeed, you’ve spent lot of time and money to get funds from your bank, other banks and small business development institutions. Sadly, there’s not a glimpse of hope, not even an invite for an interview. Giving up hope, you’ve decided to terminate your project. However, luckily for you, someone suggested that you should apply to get funded by angel investors. Wow, what a break! That intervention has changed your life for the better…

So, are angel investors the solution for small businesses and start-up funding problems?

Who are Angel Investors?

Angel investors are individuals with lots of money to spare. Indeed, angel investors (sometimes called informal investors) are wealthy individuals cited by many researchers as the most important source of capital for start-up firms 1. They play a very important role with the funding of start-ups and new businesses. In fact, recent research estimates the amount of capital provided by angels to be 11 times the amount provided by venture capitalists 1.

How will you recognize angel investors?

Most of the angels are male, and are between 45 and 65 years old. Typically, they are people with a university diploma and/or professional qualifications. In fact, about 75% of the angel investors have a university degree, and about 20% of the angel investors have enrolled in university but have not finished their studies 2 .

Angel investors have mostly vast experience, often with successful managing companies. As a result, they’re ready to make diverse decisions, which often carry a large dosage of risk. That’s maybe one of the reasons why angel investors get involved in funding small businesses and start-ups…

What motivate angel investors to risk their capital in untested ventures?

We know that banks generally avoid funding small businesses, and that venture capitalists fund start-ups for equity and a return on their investment. So, what on earth motivate angels to invest their capital in these risky businesses? I mean, if I’d a share in the riches in the world, I’ll be on vacation for the rest of my life! I will definitely not be cultivating stomach ulcers to witness how other people try their best to bankrupt me!

But angel investors are only humans… Are they investing part of their wealth in risky businesses for the hedonic experience they get? Perhaps similar to gambling, or maybe skydiving? Luckily, some researchers 2 have given us answers about what motivate the angels:

  1. Money – money is a good motivator for most of us. Angels expect a return rate of 20-30% from their investments.
  2. Altruism – most angels feel an obligation to transfer their gained knowledge and experience to the new generation of entrepreneurs.
  3. To develop a region – some angel investors, simply invest in order to stimulate and develop the entrepreneurship in the region where they live.

What are the advantages of accepting funds from angel investors?

Well, if 10 out of 11 start-ups and new businesses are funded by angel investors, they’re surely doing the right thing? Now let’s have a look at the advantages of using angels to fund your business (David Drake in Alley Watch):

  • Angels can provide capital in small amounts. Most start-ups don’t need massive amount of money to get started. But all start-ups need some money to start. Here angel investors can be flexible – start with a small investment to test the water?
  • Angels don’t shy away from high-risk investments. Angel investors usually are quite optimistic about their investment choices. However, they often ask for a significant amount of returns to offset the perceived risk.
  • You can find angels almost everywhere. In the twenty-first century, business angel investors can be found in practically every kind of market and in all four corners of the globe. I suppose they’re only “a click” away…
  • Angels have vast knowledge and experience. It’s nice to have this support around. Indeed, it may be the difference between the success or failure of your start-up.
  • Angel investors afford more flexible business agreements. The angels are using their own money; therefore, they may be more open to negotiation in their dealings.
  • Angel investors see a bigger picture. Looking beyond mere monetary return to see a bigger picture is not something venture capitalist companies (and definitely not banks) are famous for doing.

So, why are you waiting? Go Google for your nearest angel investor! Not so fast… beware, like almost everything else in life, investor angels do sometimes have a dark side…

The disadvantages of getting funded by angels

The advantages for using angels to fund your business usually outweigh the disadvantages. However, every business owner has a different perspective about their experience with angels. For instance, here’re what B L Junk, a blogger had to say about using investor angels:

  • Angels often become controlling and will want to protect their investment in many ways. Indeed, they’re not simply buying a share of the company, they’re in fact buying their power to control and influence how the business will be run.
  • With angels involved, it more difficult to go public with your company. For example, some angels will sell their equity if their investment are not yielding a feasible amount.
  • Angels rarely reinvest when the company is unsuccessful because of the risk of losing more money.
  • Just like any business partner, angel investors might disagree with each other. Unfortunately, this disagreement can create a setback for the company who are caught in the middle of this drama – preventing it to move forward.

But how can angels be devils in disguise?

Because the dealings with investor angels may be informal, and you’re mostly got to do with an individual, things may get devilishly wrong…

“What differentiates a great early-stage investor from someone no entrepreneur wants to take money from unless they absolutely have to?” asks Nir Eyal in The Harvard Business Review. That’s a very important question to ask and the answer isn’t straight forward…

Nir Eyal sketched a scenario in the article where the entrepreneur, who needed funding urgently, had only one offer from an investor angel – one which she doesn’t like! A bad scenario indeed – only one choice,  but if taken it may result in bad outcomes. Checkmate.

So, how damaging can a bad relationship between the entrepreneur and investor be? Bad, very bad…

The entrepreneur is experiencing self-doubt in her abilities. On the other hand, is the angel thinking how much money he will lose.

Best is to do you homework before approaching angel investors. Try to approach only investor angels that share your values and goals for the business. Remember, your relationship with the angel is the same as to be married – there’ll be lots of fighting and arguments – but sadly without the sex to make it up afterwards…

A frightening situation I would say!

Concluding

The chance to get your start-up or new business funded by investor angels is 10 x better than getting money from banks or venture capitalists. However, having a better chance to get funded doesn’t mean you can prepare a sloppy business model of business plan. Indeed, if you’re well prepared and confident, you’ll secure funding by the best angels.

This post concludes eBizplan’s 3-part series about start-up funding. The other two post are:

  1. How easy is it for SMEs to get Business Loans from Commercial Banks?
  2. How to get a Venture Capitalist to Fall in Love with your Business Idea.

A well-researched and written Business Plan helps to get your business started the right way.

Notes

1 Morrissette, S.G. 2007. A profile of angel investors, Journal of Private Equity, 10(3):52-66.

2 Ramadani, V. 2012. The importance of angel investors in financing the growth of small and medium sized enterprises, International Journal of Academic Research in Business and Social Sciences, 2(7):306-322.

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Douw G Steyn

Douw G Steyn

Management consultant, blog writer, dreamer

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