Risks of Using an Angel Investor

Angel investors can be a great option for entrepreneurs looking to raise money. Angel investors are often willing to give capital to risky businesses that other lenders wouldn’t touch with a ten foot pole. They also may be willing to lend at more reasonable rates and don’t charge the same fee. Unfortunately, angel investors come with certain terms and risks that may not be appealing to many entrepreneurs.
Despite their name, angel investors do not exist to protect entrepreneurs or guarantee their success. They are in business to make money just like anyone else.

One problem with angel investors is that they tend to be one-time investors. Angel investors know that the vast majority of the businesses they invest in are going to fail. They would rather spread their money out, knowing the few businesses that succeed will make up for the ones that went bankrupt. They want to balance their portfolios and will rarely put more money into a company. This is especially true for companies that are losing money.

Another concern with angel investors is that they are looking for equity financing. This isn’t necessarily a bad thing in and of itself. Everything comes down to the goals and priorities of the entrepreneur. Many entrepreneurs have a hard time accepting that angel investors are going to take a substantial chunk of their company. Before you accept an angel investor, you have to decide whether or not you want to give up a share of your company like that.

The success rate of investors seeking angel investments also is fairly low. Much of this is attributed to the way entrepreneurs perceive the capital they receive from an angel investment. When entrepreneurs receive large lump sums of money, they are more likely to spend it frivolously. Entrepreneurs who seek microfinancing may end up being more successful because they need to learn to spend their money much more carefully.

Finally, entrepreneurs need to think about the impact angels are going to have if they run a significant part of the company. Angels may be passively or actively involved. Either way, they are going to demand results and have some influence in any company they invest in. They may require entrepreneurs to give up some of their visions. As an entrepreneur, you know your market and what it takes for your company to succeed better than any angel investor. If you aren’t comfortable with the direction an angel wants to take your company, then you might not want to invest with them.

Before you consider using an angel investor, you need to be aware of the risks. Angel investors may be ideal for many entrepreneurs, but you may be better off pursuing alternative sources of funding.

Kalen Smith is a personal finance blogger for www.MoneyFile.net a personal finance website in the saving and financial advice sector.