Angel investors are private individuals who invest in other businesses. They typically work with small and mid-size start-ups, entrepreneurs or young companies that need a limited injection of funds. Although sometimes seen as a better solution than venture capital funding for some businesses, working with an angel investor also has disadvantages.
Advantage: Funding Range
For many small businesses, an angel investor may be a more suitable source of start-up funds than a venture capital firm. Angel investors usually invest in amounts from a few hundred thousand dollars up to $2 million, which can provide most of a company's needed start-up capital. Entrepreneurs searching higher amounts of seed funding will be able to raise more money through venture capital firms.
Advantage: Business Acumen
Angel investors are experienced in the field of business and can usually bring a great deal of that experience to any business venture. As one of the few investors in a start-up, angel investors may take a significant part in decision making. Angel investors, however, do expect entrepreneurs to handle the daily operations of business.
Advantage: No-Debt Financing
As opposed to loans and other forms of credit financing, angel investor funding is a much cheaper form of seed capital. Angel funding does not require monthly payments on the capital and interest, aside from the portion of company profits apportioned to the investor. The ownership share allotted to angel investors typically starts at about 10 percent, but increases with the amount of funding invested in the business venture.
Although angel investors may provide necessary guidance, some may make demands on company control that entrepreneurs find to be excessive. Even when the relationship is good at the outset, feelings between an entrepreneur and his angel investor may sour over the course of months. The disadvantages of too much involvement are exacerbated when an angel investor does not have industry experience.
Disadvantage: Less Transparent
Compared to venture capital firms, angel investors are much harder to research and contact. Whereas venture capital firms are required to register with the U.S. Securities and Exchange Commission, angel investors are typically individuals who do not invest enough seed funding to trigger SEC regulations. Venture capital firm requirements include filing informational disclosures with the SEC about individual offerings. SEC regulations released on June 22, 2011, however, released venture capital firms from disclosure requirements mandated under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.