When securing funding from investors, there are different strategies and opportunities behind that investment. Some companies may be solely gaining the financial resources necessary to execute their business decisions, while others benefit from the expertise that an investor can provide. Investors will want to be kept in the loop about how their investments are doing so they can determine what needs to be done, businesses can do this by implementing software from websites such as https://www.upmetrics.com/solutions-investors.html to help with solutions at keeping their investors informed.
Angel investors are only partners in a business if they are involved in driving the company forward beyond the monetary contributions they make. Angel investors are partners when they offer strategic insight and resources to help the business grow. They are not automatically deemed investors and can be passive sources of funding.
Partnerships are typically written legal arrangements where the partners contribute funding and are responsible for losses as well as share in profits and growth. This does not often occur when angel investors provide funding, but the company’s relationship with angel investors may be beneficial for the company beyond the monetary exchange.
Angel Investors as Partners
Angel investors provide their own money to fund a start-up in exchange for an equity stake within the company. For many small businesses, these angel investors are often people they know or high net-worth individuals that believe in your business. Because angel investors aim to make a profit from their investments, funding your business means they have confidence in your plan.
Some business owners may refer to their angel investors as partners. Still, the partnership is different than a formal partnership, where legal responsibility is shared between the investor and business owners (Source: LinkedIn). These types of partnerships are more common among business owners. Because angel investors are not typically acquiring a large percentage of the business, they can serve as partners in the sense that they provide guidance.
While the monetary sum is a primary reason companies seek investments, the added value angel investors can provide may be even more valuable. Seeking out specific angel investors can create strategic partnerships for growth.
Some of the most important benefits of angel investors serving as partners include:
- Experience and expertise: Angel investors typically allocate funds to multiple companies that are building their portfolio. If they are a hands-on investor, they may offer great advice and insight into ways to help the company grow. These partners serve as a sounding board for company decisions and are an excellent resource (Source: Angel Investor Report).
- Mentoring and management skills: Beyond the business experience they may have in a specific sector, having a mentor who is well-versed in management will help to keep the company on track and working toward future performance milestones.
- Connections: Many angel investors are well connected to other investors and businesses that may benefit your company. Building your network may attract new investors or give you access to important resources and partnerships for further growth. When choosing between investors, one with useful connections will benefit you more than one with only money.
- Future recruitment: Changes in leadership or additions to the team may be required as the business grows. Angel investors may be needed to fund these additional roles or have access to other individuals who may fit these roles. If the investor is well-known or respected, recruiting may be easier to attract qualified candidates.
The level of involvement may vary from investor to investor, with some wanting to be completely hands-on, and others just want to see returns on their investment. As a company, consider choosing an angel investor who is accredited by the Securities and Exchange Commission (SEC) to ensure they have adequate funding resources (Source: Investor.gov).
Should You Work With Angel Investors?
Working with angel investors depends largely on what your goals are as a business (Seven Signs Its Time to Approach Angel Investors). They are often sought after because they are willing to invest in start-ups at their riskiest stages and can offer the money and guidance needed at crucial growth periods for a company. They can either serve as a silent investor for the funding or be more involved as a partner.
You should consider using an angel investor for the following reasons:
- Funding source: If you do not want input from investors and only need cash, angel investors are suitable options. Typically, investors want to gain equity in the company, but they may also offer funding as a loan or convertible debt (Source: Fundable). When these funds are exchanged for equity, you do not have to pay the angel investor back.
- Partner: Partnership with an angel investor allows for feedback, mentoring, and expertise. Even if you do not necessarily need lots of capital, offering equity in a business may be a strategic move to gain the added benefits that partners provide. These benefits may not be offered from other sources of funding (including many loans).
- Discipline: With external investors, it requires that your business stay disciplined in your decision making and day to day operations. Other parties are relying on your success, and this will keep the business focused on excellent execution.
You must also consider the potential disadvantages of using an angel investor to fund your business. Angel investors may not be the best choice for every business, especially when having to give up decision-making power in the form of equity. ]
These are the primary challenges companies are presented with when using an angel investor that expects to have a partner role in the business:
- Loss of control: Angel investors could leverage their equity stake to change the vision for the company. A company may give up too much equity in exchange for needed money and, at the same time, lose control of the business when investors drive the company in a different direction (Source: Forbes).
- Added pressure: When investors are involved, there is added pressure on performance as they want to see increased profits. While this should also be a primary goal of yours, it may encourage businesses to make decisions they don’t want or aren’t ready for.
- Depletion of equity: Beyond changes in control, giving up equity to an angel investor also makes the profits for the business smaller. Sharing the profits may be beneficial if it means greater overall growth, but you could be giving up a large chunk of the pie. Consider unique and specific funding options with investors to maintain equity (Source: Early Growth Financial Services).
- Difficult to find an ideal investor: Choosing an investor may be a challenge whether you have too many or not enough options. The ideal investor will depend on your goals, but it may be difficult to find one that matches up to your standards in every category.
Fortunately, you can mitigate many of these disadvantages by being very selective and staying firm to your mission. This can be difficult, especially if you have to make compromises to obtain needed resources. Keep in mind that angel investors are willing to take on a fair amount of risk knowing that your business may not succeed.
Using Angel Investors as Partners
As a business, you will first need to determine why you are looking for individual investors and what role you expect them to play. If all you need is money, you don’t need an investor who wants to get involved in the growth and daily operations of the business. You may consider taking out loans to avoid giving up any equity in the business.
Because equity is determined more valuable than debt, you want to get the most out of the investor who will be taking a percentage of your business. They should provide you with needed funding but also add value as a partner. Ask potential angel investors their desired level of involvement and if promoting the growth of the company themselves is important.
If you are open to collaborating and taking advantage of an investor’s experience and connections, they can be a really valuable asset. The exchange of equity for funding and these intangibles could serve your business far better in the long-term than money alone.