Home Insights & Advice Why start-ups are using angel investments for funds

Why start-ups are using angel investments for funds

by John Saunders
17th Nov 21 4:02 pm

Businesses need funding to grow and survive. This is especially true for start-ups, start-ups have a high rate of failure within the first few years due to a lack of funding.

This is because start-ups have limited funding options due to being new businesses in the growth phase, and not having a solid track record of turning over profits.

Traditional bank or business loans are usually not an option for start-ups. Financial institutes and not willing to take the risk of lending them funds, and if they do, the repayments can be crippling.

For these reasons, one of the most common and effective types of funding for start-ups is angel investments.

In this article, we’re looking at what angel investments are, why this form of finance is so beneficial to start-ups and small businesses, and some of the other startup investments available.

What is an angel investment?

Angel investment is the term used for funds invested into a business by a high-net-worth individual or a group of individuals. These types of investors are known as Angel Investors.

Angel investors invest their own money into small businesses in exchange for equity. This means the business does not have to make any repayments, and the return to the investor is dependent on the success of the business.

From the company’s perspective, there are other benefits aside from not having to make repayments. Angels often invest in businesses they are able to provide expertise to, and as their return is reliant on the business succeeding they will often offer their help for free.

Benefits of seeking angel investments

Some of the benefits of seeking investments from angel investors include:

  • Being able to raise a large amount of funds quickly. Angel investors can make decisions quickly and there are fewer hoops to jump when working with a bank or financial institute.
  • There are no repayments. For start-ups, entrepreneurs, and small businesses, not having to make repayments or accrue interest is pivotal to their growth as it allows for more working capital.
  • Business owners still retain control. Angel investors typically take a share between 10-25% which leaves the business owners firmly in control of how to operate the business.
  • It opens up more opportunities and you can leverage the angel’s expertise. Angel investors are often well connected and can help connect business owners with more investment opportunities. They also typically invest in businesses within industries they know well and can offer support.

Risks of seeking angel investments

The best part about working with angel investors is that most of the risk, and the upside, are on the investor’s side.

From a business owner’s standpoint, the main risk is that you will not see any growth as a result of the additional funding or you will not receive much support from the angel.

You’re also giving a share of your business over to the investor. This is often unavoidable as you need the funds to grow your business, but it’s something to factor in as your business and profits grows.

Is angel investing right for you

Most businesses that seek angel investments are in the early stage, pre-profit, or pre-revenue stage. If they are generating revenue, they will be turning over less than $5 million.

There are no particular sectors that are better than others, although the more scalable the business is the more likely it is to attract investors. Angel investors typically invest somewhere in the region of £50,000-500,000.

If your business falls within these criteria and you’re in need of funding, angel investments is certainly something that you should look into.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.

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