The Advantages & Disadvantages of Angel Funding

When searching for seed capital to start a business, an entrepreneur may take a few different avenues in a search for funding. Small and mid-size start-ups often seek out funding from angel investors --- private business individuals who can infuse hundreds of thousands worth of capital into a venture. The advantages and disadvantages of a particular angel investor may usually be assessed through established business contacts prior to the investment.

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 up to $500,000, which can provide most of a company's needed start-up capital. Entrepreneurs searching for $1 million or more in 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.

Disadvantage: Control

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.

References

• Go 4 Funding: Pros and Cons of Angel Investing
• RevenueLoan: Angel Investment vs. Royalty Based Finance
• Business Link: Business Angels
• Google Docs: National Venture Capital Association: Venture Capital Funds and SEC Disclosure: An Overview
• NYTimes.com: Venture Capitalists Get Some Regulatory Relief; Evelyn M. Rusli; June 22, 2011