Using their own money, angel investors specialize in providing financial backing for small-business owners and entrepreneurs during the startup phase and beyond. These investors can sometimes mean the difference between an idea becoming an empire or never getting off the ground. You know how real estate investors purchase up tons of land? Angel investors are very similar, only they deal in ideas and businesses.
The Pros and Cons of Angel Investors
All funding comes with risks, however. For example, seed investors can result in you having to report to numerous stakeholders. Unlike seed investors, a sizable loan from the bank means you’re only held accountable by the bank. But a bank loan often translates into hefty interest rates and in many cases, less money than you’d get from an investor.
Like other forms of financing, angel investors have their own pros and cons. Let’s take a look.
Pro: Angel investors are willing to take risks
Angel investors are often established entrepreneurs who understand the degree of risk involved with establishing a small business. Unlike banks, angel investors aren’t afraid to throw investment capital at an idea that seems like it has potential. This is generally the result of several things:
- They have an investor network and can get multiple people to invest.
- They’re well-versed in business development and have the foresight a bank lacks.
- Because of their entrepreneurial background, they know a good investment opportunity when they see one.
- They have private equity to spare and don’t have the same concerns as a bank.
Con: Angel investors may set the bar higher
An angel investor’s higher risk tolerance may come with the expectation of a high return. They’re in business to make money, and when there’s a substantial amount of capital on the line, they’re going to want to see a payoff. It’s not unheard of for angel investors to expect a rate of return equaling 10 times their initial investment within the first five to seven years. An unhappy angel investor could mean no more funding from them in the future.
Again, with a bank you’d be paying interest every month on your loan. This is simply the tradeoff you make by going with an angel investor. There’s no interest now, but the angel investor comes with the expectation that their angel capital will grow into something larger.
In short, the pressure to deliver can be intense.
(Hey, angel investors became wealthy individuals with large net worths by being smart and aggressive.)
Pro: The money isn’t a loan
When you take out a small-business loan, the bank expects you to pay it back, regardless of whether your venture actually succeeds. Angel investors operate under a different set of rules. They provide you with the money you need to get going and, in exchange, they get an ownership stake in the business. If your startup takes off, then you both reap the financial rewards. If the business fails, the angel investor doesn’t expect you to pay them back.
Note: This does mean the angel investor might have an exit strategy in place if things aren’t looking good. The wrong decisions can doom early-stage companies very early on. In which case, the remainder of the angel investment might be pulled.
Con: There are strings attached
Even though you’re not technically obligated to repay the investor the money they chip in, there’s a catch. When you hand over equity in your company as part of the deal, you’re essentially giving away part of your future net earnings. The percentage of ownership an angel investor asks for typically depends on how much they’re investing.
If you expect your business to be wildly successful, it could add up to a lot of money you won’t be able to claim. When you’ve got an offer on the table, review the terms carefully to make sure the amount of ownership the investor is requesting doesn’t infringe on your own ability to make a profit.
Pro: Your odds of success increase
Typically, angel investors bring years of experience to the table, and they already know the ropes when it comes to starting a company. (Remember, these are often people with numerous business ventures under their belt.)
If you’re seeking advice and guidance in addition to funding, an angel investor may offer a wealth of valuable knowledge. With the right angel investor and mentor, you could end up a part of the next generation of angel investors.
Con: You’re not in total control
Because angel investing comes with so many risks, some angel investors may want partial control over your company as well. Seasoned venture capitalists may see a great opportunity in your business but may also want more say in how things are operated.
Even if they leave the reins in your hands, you may have to explain the reasons behind your choices.
Quick tips for securing an angel investor
If the pros and cons sound fair to you and you’re still interested in finding an angel investor, you’re in luck. Securing an angel investor is no walk in the park, but it’s also not impossible in the age of social media and networking.
Follow these tips and you could be on your way to finding the investor you need.
Create your dream angel investor
Before you do anything, it’s important to have an idea of what kind of angel investor you want. Is this person involved in numerous industries or only yours? How much money are you looking for? What kind of control are you prepared to give this person?
These are all questions you need to answer ahead of time, so you’re ready when you’re on the spot.
Join an angel network
There’s a social media network for everything. Angel investors are no different. There are numerous angel networks out there, from Angellist to more regional networks based in your city or state.
Join a few and see what kinds of people are posting in them. If you feel good about one of the networks, start building some relationships and see if you find the right person.
Find a local angel group
Unlike online angel networks, local angel groups can have less competition and be more personal (unless you’re in a major hub like New York, in which case you may want to branch out).
Find a local angel group and go to a few of their gatherings. Then see if you hit it off with any potential investors.
Consider equity crowdfunding
Equity crowdfunding is the act of sourcing numerous investors or funds, generally online. Think of this like Kickstarter, but in the more general startup investing sense. Equity crowdfunding can be a great way to raise capital quickly. Be warned though: just like seed investors, this can result in you having numerous people to report to, and increase the stress you’re under.
Angel investing: Is it worth it?
Launching a business is hard work from the moment you draft a business plan to the day you open the doors of your new business. Finding an angel investor is no different. It takes hard work, networking, and some sacrifices.
Still, finding your business angel could mean your new venture gets the chance to take flight — all without the tradeoffs that come with being a public offering. (You don’t want to worry about pleasing shareholders already, do you?)
Remember: angel investing is a high-risk gamble for the investor, so be prepared to make some sacrifices if you decide to go this route. Do your due diligence when vetting investors. Don’t sell yourself short: Wait until a worthy individual comes along. You’ll know when you’ve found the right person. And when you do, it’s all worth it.
Related:
- How to create a website for my business: 8 steps and tips
- How to start an e-commerce business and succeed in 2023
This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org.
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5 tips for organic business growth
It’s no secret that startups have a prodigious failure rate. In fact, according to a recent Entrepreneur.com study, the four-year survival rate for a startup is just 49%.
With demoralizing stats like this in mind, entrepreneurs may be tempted to grow their profits through any means necessary, including inorganic strategies like acquisitions or mergers. However, the truth is that business owners can achieve impressive growth through organic strategies as well, allowing them to retain control of the companies they built from the ground up.
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Also known as “true growth,” organic growth refers to the process of growing a business by reducing costs and increasing sales, either by finding more customers or enhancing output to current clients. On the other hand, inorganic growth occurs when a company merges with or is acquired by a second business. Entrepreneurs should take the time to familiarize themselves with the advantages of organic and inorganic growth, as well as some of the top strategies for execution, so they can decide which is the best choice for their business.
As a new business owner, you’ll likely want to increase profits as quickly as possible. By employing inorganic strategies like mergers and acquisitions, startups can grow their businesses more quickly while taking advantage of resources such as stronger credit lines and expanded market resources. Additionally, joining with another company lets you take advantage of its expertise and experience in the industry to develop your own brand.
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By merging with another business, you agree to hand over some of your control and equity to another company. Not only can your initial vision become diluted, but you may also be forced to take on new business and managerial challenges before you’re truly ready. In some cases, you may have to rush to grow your staff and production capabilities to keep up with demand.
On the other hand, organic growth techniques allow you to grow your business on your own timeline. Because you aren’t sharing control with another company, you can hire employees and expand sales at your own pace. Additionally, entrepreneurs who maintain their autonomy now can sell for a larger profit later when the company is fully developed.
While retaining control of your company offers many advantages over the long haul, it can make business growth challenging in the short term. Some entrepreneurs struggle to grow beyond their current marketplace, while others find themselves cut down by the competition. Additionally, new businesses must often fight to make ends meet from month to month. Fortunately, strategies exist to help startups grow their profits without handing over control to partners or investors.
Here are just a few of those strategies to help you grow your business organically:
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Want to grow a business that will feed your family and employees for years to come? The first step on the road to entrepreneurial success is starting the right kind of company.
With home-based and e-commerce businesses, you can avoid expenses like rent and commuting during the early, lean years of your company. As an added bonus, working out of the home lets you write off parts of your mortgage and electric bill. You can then invest these savings back into the business to help you grow in the long term.
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A common conundrum for new business owners is whether to take your full cut of the profits or invest the money back into your company. While you may be tempted to keep some of those hard-earned dollars for yourself, you should aim to reinvest gross profits whenever possible to help your business grow. Investing your own money shows prospective clients and lenders that you are confident in your company’s long-term potential.
Not sure where to put profits? When in doubt, invest in marketing, SEO and other tactics likely to generate more business for your startup. If your income permits it, you may also want to invest in employee training and technological improvements, as these can yield large profits down the line for your company.
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No matter how happy your current clients are with your offerings, you will have trouble growing your business organically if you don’t put effort into finding new sales channels. If you don’t currently sell your goods online, you should definitely consider starting a website to expand your reach to other regions. Additionally, you can introduce new products, cross-market services to your existing clients and expand to different markets. For example, a company that specializes in SEO may want to expand its services to include social media and search engine marketing.
Finally, business owners should employ market segmentation to customize their strategies according to the specific channels they are leveraging and the specific markets they are trying to reach. This way, you can create unique campaigns based on customer location and demographics and watch your sales rates skyrocket.
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As a new business owner, you may feel the urge to micromanage everything that happens at your company. However, the truth is that macro-management is a far more effective way of enabling organic growth for your startup.
To keep your company moving forward, you should train top employees to take over some of your daily responsibilities. While you may be tempted to keep costs down by hiring employees who will work for less, in the long run these staff members could end up costing you more if their efforts aren’t up to par. Find people you can trust to get the job done—even when you’re not around—so you can focus on growing and developing your business in the years to come.
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From minimizing spending, to reinvesting profits back into the business, organic growth strategies help ensure that you will retain control of the company you worked so hard to build. Do your research, and consider all the growth strategies available in order to give your business the best shot at success.
Do you know how sales taxes are impacting your bottom line? Check out our sales tax calculator.
This article originally appeared in the QuickBooks Resource Center and was syndicated by MediaFeed.org.
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Featured Image Credit: elwynn1130 / istockphoto.
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