Should Startups (Really) Raise Angel Investors Money? Full Guide

If you’re raising funding for your startup, angel investors are a great option: beyond money, they can also offer many perks (network, clients, etc.). Yet, raising angel investors money also has some disadvantages for startups.

What exactly is an angel investor? What’s the difference vs. VC funds? Should you raise angel money for your startup?

In this article we’ve listed out the 10 pros and cons of angel investing, we’ll cover:

What Is An Angel Investor?

Also referred to as “angel”, an angel investor is a private individual who has the financial capacity to provide initial capital for a business or a startup. In return for their investment, angels get shares in the company in the form of equity or convertible debt.

Angel investors may sometimes provide a one-time investment to startup businesses in order for them to launch their company. Most often however, angel investors pledge continued financial support: they reinvest in further rounds as the startup scales up, until it makes a profit.

Make no mistake: angels rarely invest out of pure altruism, and their investment is never free money. Instead, angel investors look to generate a profit out of their investment.

Because angels often invest very early on (unlike VC funds – more on that below), they typically look for significant return on investment. A study actually looked at the returns of 3,097 investments by 538 angels worldwide. On average, their return was 2.5 times, meaning an impressive IRR of 27%.

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The 4 Different Angel Investor Types

Angels are actually very diverse. They typically fall under these 4 categories:

1. Friends & Family

The first kind of angel investors simply is what we call “friends and family” money. Indeed, each year 35-40% of startup ventures receive capital from friends and family.

Whilst friends & family aren’t necessarily affluent individuals with strong expertise nor network connections, they’re also a kind of angel investor.

Often though, we separate friends and family from more affluent and knowledgeable private individuals as they are 2 very different types of investors.

For more information on friends & family funding for startups, see our articles below:

startups angel investors

2. Private Individuals

Affluent private individuals are the most common type of angel investors.

Whilst it’s very difficult to size their number (as explained in this great report from the British Bank here), they’re thousands of them out there.

Literally anyone who has a few hundreds of thousands to millions of pounds in their savings account and who is willing to invest in startups can be an angel investor.

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3. Group of Investors

There are also UK angel investors who have decided to pool their investments in a syndicate instead of investing solo.

The professional syndicate management team is the one who engage with startups and choose the best one to give their money to. This allows angels to reduce risks (by diversifying their investments across many startups). Also, that way angels share their due diligence process with other angels to make better investment decisions.

4. Crowdfunding Platforms

Crowfunding platforms also are a kind of angel investor.

Indeed, like any investor group, crowdfunding platforms gather a number of small investors to fund startup businesses. Investors can be literally anyone as the minimum investment often is as little as £100.

For more information on the top crowdfunding platforms for startups, see our articles below:

startups angel investors

Angel Investors vs. VC Funds: What’s the Difference?

Since VCs mostly finance later stage startups, most startups first opt for angel investors first before going to VC funds. Yet, both routes have advantages and disadvantages for startups.

Let’s see together what are the key differences between angel investors and VC funds:

  • Angel investors are private individuals who use their own savings to invest in risky startups. VC firms use raised public or private capital to invest in businesses that they deem will have a high return in a short span of time, and avoid risky startups.
  • Angel investors are highly flexible in their investment and decision process. Indeed, they’re not bound by anyone else’s risk management or reporting requirements. Instead, VC firms will require a board of directors’ meeting first before deciding to invest.
  • Most angel investors typically invest anywhere from £5,000 to £150,000. VC funds instead, almost always invest more than £250k, and sometimes more than £1 million (especially if they are lead investors)
  • Angel investors might stay invested for the long-term. VCs instead want high return on investment within a specific timeframe (5 to 10 years). Also, they will not hesitate to abandon any investment that will incur them heavy financial losses

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Angel Investors: 10 Pros and Cons

Angels are a great alternative to raise capital and expand your network. Yet, they’re not for every startup. We’ve compiled below a list of pros and cons for you to make an assessment before deciding whether or not angels are for you.

Pros

  • Easy access to capital: Angel investors fill in the gap between traditional institutions (VC funds) and entrepreneurs’ own funds. As such, they are willing to take on more risks vs. VC funds. This also comes with less due diligence: startups are often required to submit a pitch deck and funding can be accessed in a matter of days.
  • Guidance and support: the best thing about working with angel investors is that most of them have real business experience also and you get more than just monetary support from them. 
  • Networking opportunities: they say that you’ll get further with knowing certain people than with what you know in business and this is especially true for startups. Angel investors can also help startups connect with prospective clients.
  • Angels can help you raise (additional) funding: Angel investors can decide whether to give you another round of funding or not, or even better, they can introduce you to more angel investors who are willing to do that. This allows you to have more time to focus on growing your business while the angel investors focus on fund raising.
  • Angels can help your startup build strategic partnerships: beyond giving financial assistance for capital, UK angel investors can also help startups build strategic partnerships and make valuable introductions to potential clients or business partners. 

Cons

  • Angels typically invest less vs. VC funds. The median initial investment is around £45,000. So, if you need a bigger amount for capital, then you’re going to have to contact more angel investors to come onboard your startup
  • Terms (money) can be expensive. Because angel investors typically invest in startups early on, it’s not rare to see angels asking for significant equity share. Be careful not to give away too much of your company ownership early on. Read our articles on startup valuation to assess a valuation for your business, and understand the terms of investment
  • Angel money may come with pressure. As explained earlier, angel investors invest to generate (impressive) returns. So if you haven’t agreed on your targets and milestones going forward, you might end up with unexpected pressure to grow your business at a rapid pace
  • (Some) angels have a say. Because angel investors have ownership via their investment, they are included in key decision-making and often are part of your Board of Directors. Some angels may sometimes clash with the founder’s vision for the company’s future. Their weight in the decision process is a direct function of how much equity they have. Again, because they invest early on, they often have an important say in your business’ decisions
  • Support and guidance may be limited. Not all angel investors have actual business experience. Also, not all of them have the time to actively guide and support your business. So when getting onboard a new angel, make sure they will bring value added to your business and not go against your decisions

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