Is seed money right for your start-up business?
While the average success rates for small business owners aren’t very encouraging, angel investment funded firms are more likely to survive the first four years.
Starting a business is a huge endeavor, whether you’re opening a corner bakery or launching a groundbreaking laser device. According to the Small Business Association, 30% of new businesses fail during the first two years, 50% during the first five, and a staggering 66% during the first ten.
So what gives? A number of factors play into why so many new entrepreneurs fail to thrive or even survive the first couple of road-bumps; many of which can be avoided with the right business plan and tools.
One of the main culprits that can make or break your business success, is the size of investment in relation to the nature of your project. No matter how big a chunk of your hard-earned savings and the amount of time you pour into your dream, passion and optimism alone can’t compensate for issues like a delayed construction timeline or defective prototype.
At the end of the day, someone has to pay the bills when things don’t pan out.
That is where the topic of Angel Investors comes in. While the average success rates for small business owners aren’t very encouraging, angel investment funded firms are more likely to survive the first four years.
Before we delve deeper into how to gain an investor and how it may benefit you, let’s break down the basics of Angel Investors in a few bullet points:
They Invest In Start-Ups Unlike investors who mainly inject capital into existing businesses with a proven track record for growth, an angel investor seeks out and funds promising start-ups and young companies to get them off the ground. In return, they gain equity ownership interest in what they consider a potentially lucrative enterprise.
They Take a Bigger Risk Angel Investors take a much larger risk than those betting on a more established company, but they also stand to gain a significantly greater payoff if things really take off. As a result, they are usually more engaged in the company’s economic development and place great importance on the founder(s)’ commitment to the business.
They Have A High Net Worth Angel Investors are typically high net worth individuals who can afford a larger financial stake. The size of an angel investment depends on the business, ranging anywhere from $10,000 for a small start-up to $250,000 and upward for a much larger venture.
They Come In Different Forms A common misconception is that all angel investors fall into the category of “archangel/super investors”; meaning they have a long and successful investment record and (usually) belong to a large venture capital community. An angel investor can also be a former colleague, distant business connection, family member or friend. Alternatively, your funds can manifest themselves through a crowdfunding entity or a domain investor targeting only your particular field. You don’t necessarily have to have only one investor either—it’s not uncommon to gather funds from several of the above sources.
They Like To Diversify Most angel investors or seed investors prefer to diversify their investment portfolios as a measure to minimize risk, placing no more than 10% of their total investment capital in a single business. They tend to look for a defined exit strategy such as acquisitions or initial public offerings (IPOs).
Accredited Investor Status Although it isn’t a requirement, seasoned angel investors are generally accredited. As defined by the Securities and Exchange Commission, an accreditation status entails either: a) a net worth of $1 million in assets excluding personal residences, b) an income above $200k for the past 2 years, or c) a combined marital income of $300k.
Is an Angel Investor right for you?
There are both advantages and disadvantages to partnering with a private investor, and it’s important to evaluate the pros and cons before making such a large decision.
Your start-up or expansion capital needs are met. That’s a big one, as there is no getting around the immense benefits of having an investor filling a financial void. Due to the large risk and reasonable rates, an angel investor is more likely than, for example, a bank to make sure you have adequate funds for success.
Besides providing financial assistance, angel investors are typically more invested in your business success and can bring valuable experience to the table at critical stages of business development.
The fees and terms tend to be more reasonable than that of venture capital injection, which will make a big difference during the first few years. An angel investment also comes with a significantly smaller personal risk than a traditional loan, since the capital doesn’t have to be paid back if your business fails.
Bringing on board an investor means you are entering a partnership. While some investors are silent and leave the majority of decisions to you, angel investors will be more involved and keen on making things work. In other words, you lose some of the control you had as a sole business owner.
Finding the perfect angel investor for your unique business can be like searching for a needle in a haystack. The wrong fit won’t benefit anyone in the long run, so take your time and narrow down the options before refining and targeting your business pitch.
Not all angel investors choose to reinvest some of their profits to facilitate further growth, even if the business does fairly well. Ideally, you will have or gain access to more than one source of funds throughout your business progress; however, discussing the terms of a potential follow-on investment early in their involvement will help you plan the future of your company.
If you do decide the pros outweigh the cons for your business, Women Founders Network provides terrific opportunities specifically to learn more about business, develop a solid pitch and attract an angel investor.
Stay tuned for our upcoming articles about this very topic, including “3 Things Every Founder Needs To Know” and an exclusive interview with investor Nancy Hammerman at the end of the month!
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Photo by Inês Oliveira