What are the pros and cons of angel investors?
Angel investors have come to be a very big part of the startup ecosystem. They can be highly desirable connections for startup entrepreneurs seeking funding. Many hyper-successful entrepreneurs end up becoming angel investors themselves.
However, before you go rushing in to create a pitch deck for them, stalk them and ask for money for your startup business, it’s smart to know what the pros and cons of angel investors are.
What Are Angel Investors?
Angel investors are typically individuals who simply have the money to help fund startup businesses. They can be professional investors. Though they may also simply be professionals who have the cash and are excited about putting their capital into this asset class and helping others get their new ventures off the ground.
This can include university alumni, doctors, lawyers, CEOs, high income earning tech workers, and other entrepreneurs. Including those who have recently had successful exits of their own.
While angel investors often work alone, they have also increasingly been teaming up as angel groups to spread risk, benefit from the efficiency and gain access to deal flow. The video below will give you a better idea of how angel investors and angel groups work.
The Pros Of Angel Investors For Startup Fundraising
Angels are one of the first stops on the way to the big money
After raising your friends and family round, angel investors are typically your next round before moving onto VC and strategic startup capital.
You’re unlikely to leap right to venture capital funds. It does happen. Though angels write certain sized checks, based on early stages.
This is the money you need to seriously get started, build out your team, prove your concept and hone your business model. All before you are ready to put real liquidity in to scoop up the market and go really fast.
Easier To Raise Money From
The good news is that angel investors can be relatively easy to raise money from.
Angels are more willing to take risks than other types of investors, like big funds and banks. In one sense they have to at this stage. They also understand that investing so early has the potential to create the biggest gains and wins. Not all will pan out. Though the wins can more than make up for the losses.
It’s not unusual for angels to fund you simply based on your business plan and who you are as the founding team. This is even easier if you have a personal relationship already established with them.
Angels Are Easier To Work With
Not only can angel investors be less demanding when it comes to pitching, but getting from a yes to money in the bank can be a lot easier too. You may not have to jump through all the due diligence hoops and processes and hundreds of people involved that you will deal with later on.
If you ever have to pivot or things are going wrong, angels may be more understanding and easier to work with too. On the DealMakers Podcast, I’ve even interviewed founders who have failed on their first startup, and still got their angels to reinvest in a new venture or allowed them to roll the money over into a new project.
Introductions To The Next Level
Experienced angel investors will already have a network of more sophisticated investors. They should know the private equity, VC partners and strategics who may want to fund your next round.
They can make those warm introductions and recommendations during the startup fundraising process. That can make it a lot easier when you need that bigger check at your next round.
The Cons Of Angel Investors For Startup Fundraising
One of the real cons and limitations of angels is the check sizes they write. Individually, they are probably not going to write you that $2M check. They may not have the funds to participate in the next round. You may solve this by working with angel groups. Or you will have to piece together funds and manage a larger number of investors.
Besides Mark Cuban and the rest of the cast of Shark Tank, most angel investors are not well known. They are not highly visible. Unless you personally know them already, it can take some serious work to hunt them down. Or you are investing a lot into joining crowdfunding platforms and tapping their lists of active investors.
Giving Up Equity & Control
Bringing in money from angels is done in exchange for giving up equity and control. The earlier you raise, often the large percentage you are giving up. The longer you can afford to bootstrap, the less you will give up and on better terms for you.
Not As Experienced Or Organized
Many angels are not professional investors or startup experts. They are excited about participating. They may be happy to fund you and take some equity. They just might not have experience in taking a new startup through to being worth billions and an exit. They may not know how to best prepare for the next round or an IPO. This is where having an M&A advisor and pro fundraising consultant will make all the difference.
When it comes to the pros and cons of angel investors, they may not have an organized due diligence process. Which can be a pro or a con. They may not always vote your way in the future if they don’t understand your decisions from experience.
Remember that storytelling plays a key role in fundraising and you will need capital to scale things up. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
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