The Pros and Cons of Angel Investors
2 min read
Sep 27, 2022 9:51:37 AM | Assure
An angel investor is more than someone who invests in the early stages of a company, they're a valuable resource that can help set trends and to pivot companies and industries in positive ways.
Most angel investing is helping take companies from inception to the next level, through the startup phase to going public and beyond. After all, if you get in at the right time, your investment could pay substantial dividends for years to come.
What Is an Angel Investor?
Angel investors are essentially private investors who fund a company or an idea at the initial startup stages. Since new companies need capital to expand, hire talent and build, it's the angel investor who lends their funds in exchange for company stock or ownership equity. Sometimes an angel investor is simply a family friend with capital to spare. Other times they come from specific angel investor networks that scour the country and world for companies to invest in.
How Do Angel Investors Work?
While much has been made of angel investors and how they can turn a small sum into a legitimate fortune, it's not like every investment will pan out. In fact, angel investing is a risky endeavor, though the potential payoff dwarfs nearly any other investment opportunity out there. By responsibly investing, the pros can outweigh the cons of angel investing, but it's also common to not invest more than 10% of a portfolio in these kinds of initiatives.
However, the excess funds in most angel investors' portfolios lead them to speculate with their money, hoping for higher returns than they would be able to get with traditional investment opportunities. Rather than investing in the profitability or viability of a business, angel investors instead look towards the future, helping new companies grow to a point where the entire world must sit up and take notice. For years, angel investors may have no interest in turning a profit, while typical lenders would never have such a long-term approach.
Pros and Cons of Angel Investors
Those starting businesses can certainly look towards typical lenders to get the seed capital for their enterprise, but they'll often be left with high interest rates and less money than they may be able to get in the world of angel investors. They'll also be accountable to the bank, who may not look favorably on waiting for years for that investment to pay off, if it ever does. Angel investors are able to make that long-term investment in hopes of a large payoff, and that means better opportunities and terms for growing businesses.
Pro: Angel Investors Are Risk Takers
Some angel investors may be merely playing the market to see what kind of opportunities are available to them. Others may think that a 10% success rate of a life-changing payoff is worth the 90% failure rate, and that makes angel investors risk-takers in most people's books. For angel investors, the idea behind a business is what really drives them, not the profitability of the business model today. That's why they'll spend money supporting something that may have promise but not actual success.
Con: Angel Investors Have High Standards
Contrary to what the name may suggest, angel investors aren't investing in companies out of some kind of benevolence. They have high standards and expect a big payoff if the company is successful, and it's not unheard of to have an angel investor that expects to earn back 10 times their initial investment within five years. If that payoff doesn't materialize, they may be unwilling to invest any more in a fledgling company that may never pay off.
Pro: Angel Investors Don't Loan Money
Since angel investors aren't lenders, they're not engaged in loaning money with some kind of end date where it all must be paid back with interest. Instead, angel investors invest money in exchange for an ownership stake in the company at hand. If the company does well, the angel investor will do well, and that can mean much more of a windfall than collecting a few percentage points in interest. That said, if the business fails and never really takes off, then the company owes the angel investor nothing.
Con: Angel Investors Rely on Growth
When most institutions and people invest in something, they expect to get their money back and then some when the loan is due. Once you pay them, your relationship has ended. But with angel investors, they'll be around and have a stake in your company long after that initial investment. In fact, as long as your company exists, they'll retain a stake in it, as long as they don't sell their stake back to you or to another party. That can mean paying dividends to an angel investor for a lifetime, but it can be worth it if your company makes it big and you gain just as much.
Pro: Angel Investors Increase the Chance of Success
For all the pros and cons of angel investors, one stands head and shoulders above the rest: success. With the cash infusion possible via angel investors, you'll be increasing your chance of success. Sure, a great idea could be worth millions or even billions, but if you don't grow the right way you may never see that fortune materialize. With angel investors helping you grow, hire talent and get noticed, you'll be significantly increasing the chance of your success, and that can be worth far more than what you're giving up in trade.