venture capital

The Pros and Cons of Accepting Money From Angel Investors

Angel Investors

Last year, we shared a post about the difference between venture capitalists and angel investors and what both parties can do to benefit small businesses in need of funding. For a fledgling startup, it might initially seem as though there are only upsides to getting investors interested in your business — after all, it’s extra money that you could really use! However, there are still a few areas of the process to watch out before saying yes to the investment. Here’s a shortlist of the pros and cons to keep in mind when getting started.

Pro: You’ll have more money

Let’s bring everyone up to speed on what it is an angel investor does first. Angel investors take their existing wealth and invest a chunk of it into your business. In return, they only request a piece of equity in your startup. These investors are all around us — doctors, lawyers, and even existing entrepreneurs can all be considered angel investors. However, unlike venture capitalists, they don’t have millions to financially cushion your company with. A typical angel investment varies at $25,000 to $100,000 per startup.

If an angel investor believes in your business and its offerings, they’re willing to take a leap of faith for you and invest in it. Now, you’ll have more money to put towards your company and various initiatives to help it grow like hiring new employees. This type of money is not a loan, so you’ll never have to worry about repaying it back, but before anyone invests…

Pro: Attracting angel investors means you’ve (probably) got a great idea

Angel investors are naturally drawn to entrepreneurs that are passionate about their companies, but even more so to the ones that understand how it can succeed over time. Before they invest, they will want to see your business plan to make sure you’re on the right track. (After all, once they put some capital into it, this is a track they’ll be on too!) Here’s your chance to draft up a business plan, elevator pitch, and executive summary that views your business and how it fits into the market as critically and objectively as possible.

Con: The business will no longer be 100% yours

For some entrepreneurs, this might not even be much of a con. If you don’t mind having others take charge, stepping back to allow an angel investor to step up and take control isn’t an issue. Other small business owners might not be so on board with having an outside party take over though. As advised by QuickBooks, if you’re not ready to let go try to find an angel investor you know or who understands your business first. Talk to them about the process and ask any questions you may have before investing. This will give you a chance to find out if you’re okay with having someone else run the startup too or if it’s a better idea for you to keep your freedom as a solopreneur.

Con: You might wind up having less money

Remember when I said earlier that all angel investors want in return for investing their capital in your business is a piece of equity? Because your startup is so new to the world, the risk of success and/or failure is higher, leading to investors taking a bigger slice in the pie. These equity percentages can start at 10% or more — and that’s a lot for a new company! Be sure to discuss in advance the expectations that angel investors have with your business and whether or not you’ll be able to meet them at what they’re looking for.

 

Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @mycorporation.

Please note that KPMG Spark’s sponsorship of this blog article is not intended to address the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services. This content represents the views of the author, and does not necessarily represent the views or professional advice of KPMG Spark.

Venture Capitalists vs. Angel Investors: Who Can Benefit Your Small Business Best?

Everyone knows the Cinderella story by heart. An intrepid protagonist with big dreams works tirelessly every day and meets a fairy godmother who offers her the opportunity to go to a ball, meet a dashing prince, and live happily ever after. There’s a similar rags to riches story in the small business community too. Just swap out the protagonist with an entrepreneur, the fairy godmother with a venture capitalist or angel investor, and the ball/prince/happily ever after ending with financial backing/an IPO/overnight success boom that turns your brand into a household name.  

Things could have turned out quite differently for Cinderella had her fairy godmother not understood exactly what she needed. For rising entrepreneurs that need funding, it’s important to determine whether your startup is better suited to work with a venture capitalist or angel investor. Take a closer look at the differences between these two types of professionals and what they have to offer your startup to ensure it receives its own fairytale ending. 

Venture Capitalist

What do they do? Venture capitalists, also known as VCs, back high-growth companies early into their startup journey with equity funding. Instead of paying VCs to get their backing, entrepreneurs provide these investors with a stake — typically shares — in the company or an equity position. The capital gives the startup the ability to succeed and gives the VC an active role in the business.

Which entrepreneurs/startups should work with them? The younger and more specialized the business, the better. VCs often invest in tech-based companies like apps and software startups. They also tend to favor businesses with strong management that show signs of steady growth in an emerging market. 

What do you do if they’re interested in funding your business? Being offered venture capital is a big deal. It means that your business has the potential to yield huge returns and/or to be quickly sold to public firms. Make sure you have a good idea for your business, that the market your startup is in is large enough for a strong return on capital, and give them something in return for their early investment. Additionally, inquire about the typical check size as this will determine the kind of VC you reach out to for funding. Entrepreneurs that need less than $1 million, for example, should reach out to micro VCs as they have funds with $10 to $50 million.

Angel Investor

What do they do? Angel investors come in a wide variety of professions, like doctors, lawyers, and existing entrepreneurs, and want to invest their wealth into your business. Much like VCs, they also want equity in your startup. Unlike VCs, they can’t invest millions into your business. Typical angel investments go from $25,000 to $100,000 per company.

Which entrepreneurs/startups should work with them? You don’t have to be a brand-new startup to work with an angel investor. If you’re fairly established with some revenue, but still need extra capital, it’s a good idea to reach out and introduce your business.

What do you do if they’re interested in funding your business? Angel investors want to see your business to succeed since they’re helping fund it out of their own pocket. Entrepreneurs that pique their interest are always ones that are passionate about their company and understand how it can succeed over time within its market. Be prepared to explain your business plan, elevator pitch, and executive summary. This shows that you’re thinking about the startup’s past, present, and future — and also shows angel investors the kind of valuable role they can play in your company’s success.

 

Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @mycorporation.

Please note that KPMG Spark’s sponsorship of this blog article is not intended to address the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services. This content represents the views of the author, and does not necessarily represent the views or professional advice of KPMG Spark.

Audio Interview With Fundraising Fiend—Jess Larsen

Jess Larsen Podcast

By Austin Miller, Content Marketing Manager

Last week we sat down with Jess Larsen, founder of the Ideation Collective and Child Rescue (an organization that helps save children from sex trafficking and slavery). He's raised millions of dollars in funds for  non-profits and for-profits alike, rubbed shoulders with NBA players, Hollywood Actors, Special Forces, and high powered CEO's. Throughout his journey he's picked up a thing or two about starting a business. Luckily for you, Jess was willing to share his wisdom with us. 

Side Note: The recording begins mid-stream as we've edited the conversation to contain only the meatiest parts. Bookly was also acquired by KPMG Spark in 2018.