Many start-ups looking to grow and develop their businesses turn to angel investors as a source of funding. Angel investors are usually high net worth individuals or a group of investors who invest their own money in early-stage companies that are considered ‘high risk’ by banks and others. Angels typically take equity in the business or provide a loan that can be converted into an equity position once the company takes off.
The upside is:
- Angels are a useful alternative funding source – less risky than debt financing, and unlike a loan, invested capital doesn’t have to be repaid if the business fails.
- Angels provide support, mentorship, industry knowledge and have entrepreneurial experience. They can add credibility to a business and can introduce new business partners, customers, and other investors.
- Angels are highly motivated to help you become a profitable business and their involvement helps them safeguard their investment.
The downside:
- The founder loses equity and control. By diluting equity in the business, the founder is now a part owner, and no longer has full control. The angel will share in the profits when the business is sold and if the arrangement is a loan, the interest may be high.
- Pressure to perform. Angels usually require the business to grow fairly rapidly and meet specific milestones, hence there is pressure on the founder to deliver.
- Potential for personality Its not always easy working with other people and disagreements about direction, strategy, performance etc. may occur.
Remember: Bringing in an investor should be mutually beneficial. So ensure your angel understands your market and can add real value to your business. Check their track record and be clear on what they are offering, the level of involvement, the equity required and your obligations.
Need help to get your new idea to market: Contact INNOVIC on www.innovic.com.au or (03) 8060 3504. Interstate clients welcome. We do in-person, zoom and telephone consultations.
