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Angel Investors Part I: Should You Take Money From an Angel?

 

"Angel investors" are typically high net worth individuals that invest in a startup at very early stages and prior to institutional investors.

“Angel investors” are typically high net worth individuals that invest in a startup at very early stages and prior to institutional investors.

This is part 1 of a 2 part series on receiving angel investments.  As your start-up grows, your company’s capital needs will be unique to your business. While some entrepreneurs may be able to bootstrap their companies, more than likely your company will need to seek outside investors at some point.  Many entrepreneurs start with gifts or loans from friends and family. There is also the possibility of incubator financing for the first $15,000 – $50,000.  However, after you’ve exhausted this money and your parents’ and Aunt Mildred’s generosity (or before you approach them if you don’t want to have to give financial updates at every holiday and family event), the company may want to raise a pre-VC round from wealthy individuals, also known as angel investors.

The prevalence of angel investors is growing. Angel investors are often more approachable than VCs. Many form syndicates and are looking to invest in start-up companies in their area. When deciding whether angel financing is the right choice for your company, there are a few things you should consider.

Should you take on an angel?

Since bank loans are becoming increasingly more difficult to secure, an investor may be the best choice for your financing needs.  There are a lot of positive things associated with angel investors:

 (a) Geography: Many angel groups look to invest in and promote local start-ups.  It may be easier to catch the attention of an angel group rather than that of a venture capital firm. Additionally, angel investors are likely involved in your community and may provide necessary introductions to help your company grow.

 (b) Size of investment: Generally, angels are looking to invest between $100,000 and $1,000,000. If your company needs more money than the incubator or Aunt Mildred can provide, but does not necessarily fit the specifications of a VC portfolio company yet, this could be a good option.

(c) Flexibility:  Angel investors may be flexible in structuring the financing deal.  This may be attractive to entrepreneurs that want to have a say in the deal terms.

However, depending on the individual, an angel investor may not make additional investments in a company, so it may not be the best choice if you believe you will need another round of financing in the near future. Furthermore, angel investors do not always have experience in the industry of your business, and so may require additional handholding throughout the partnership. Taking on an angel seed round may also make it more difficult to raise a Series A round from VCs. Because angel seed rounds are often based on a loose valuation process, Series A VCs may believe that the valuation of the company is inflated and may be hesitant to invest.

The decision to raise an angel seed round will ultimately be dependent on your company and its needs. For many start-ups, angels are a good solution for pre-VC financing.

 

See Part 2 – Angel Investors II: Structuring the Angel Investment

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