Angel Investors

Advantages of Angel Investors

With a plethora of funding options existing for startup companies, it is important to consider the pros and cons of pursuing any route in trying to obtain investment. We will start by considering some of the advantages of partnering with angel investors before moving on to some potential disadvantages.

One of the main advantages of working with an angel investor is that it is "less expensive" than other funding avenues. What does this mean? An angel investor would often not take (as much) equity of the company as a venture capitalist would (see the chapter "Equity Allocation in Startups"). This might seem contradictory to how investors typically think, but in fact it aligns with the interests of an angel investor. The reason for minimizing taking equity out of the company is that it keeps the startup's strategic options open, as they will have more equity to offer later on in other funding opportunities, such as venture capital rounds (; ).

Angel investors typically look for a 10x return on their investment, which they expect to manifest over a timeline of five years; after that, they will push startups to pursue venture capital funding . Because they invest in companies at earlier stages and expect less return on their investment compared to venture capitalists, their strategic fit is often mission driven. Angel investors typically select their investments based on their interests, expertise, and ability to guide an early-stage company through development . Another benefit is that because they are both personally and financially invested in the company and most likely have previous experience in the industry, they will be able to provide sound advice .

Since angel investors invest at an early stage, they are also inherently willing to take on more risk than other funding options . In addition to their original investment in the company, angel investors are willing to provide bridging loans in order to help a company mature to the point where it can pursue additional funding avenues. Bridging loans are short-term loans that last from a few weeks to a couple of years and which provide interim financing pending the arrangement of a larger and longer-term financing agreement. At that point, the company will use funding from the new financing to pay back the bridge loan. Bridging loans can be arranged quickly with little documentation, but unfortunately they usually come with higher interest rates as these loans inherently carry greater risk to the angel investor.