Are Angel Investors the Only Way to Startup Heaven?
What are Angel Investors?
Angel investors/venture capitalists are wealthy individuals or financial institutions that provide monetary backing to early-stage businesses. These people usually have entrepreneurial experience and lend both their capital, knowledge and contacts to businesses that are just starting out.
What do they get in return? Shares or equity in the business.
How did Angel Investing Come About?
Evolution can be described as one big domino effect. One thing leads to another and before you know it, what used to be the norm becomes outdated and obsolete. The birth of the World Wide Web in the 90s was the beginning of such a domino. Its effects would change life in ways unfathomable to the human mind.
Trading and entrepreneurship was no longer for the few. The Internet opened the doors to anyone that had the idea, the skills and appetite to start their own business. Whilst the market opened its doors to everyone though, the main barrier to entry remained the same.
The principal problem to any small business wanting to enter the market has always been cash flow. Having the liquidity to hire people, invest in developing and marketing their product and services.
This is the exact point that angel investing was born. Whether it was through crowdfunding platforms or submitting business plans directly to them, business angels came to the rescue of startups.
The high growth of angel investing has been impressive and the numbers show it’s not slowing down any time soon. An estimated £850m was invested in the UK in 2018, according to a report by the United Kingdom Business Angels Association.
Problems in Paradise?
Whilst Angel Investing is both popular and potentially highly rewarding, the pitfalls and risks are many. Angel investors have a lot of things to consider before taking the plunge to invest in a company. From due diligence and financial projections, to a healthy business plan and an exciting product, the angel investor has a lot to contemplate.
More research from the UKBAA shows that 58% of angel investment deals do not turn out profitable. Not only that, they don’t even return the original investment made by angels. Whilst the principal goal of angel investing is to get the necessary cash that will propel your business to new heights, there’s a lot more that comes with it.
Angel investors typically invest in promising businesses to see their stake increase. Their willingness to give you the money you need shows a high tolerance for risk. What’s usually tied to high risk is the expectation for high returns.
Angel investors enter this game with high expectations about the possible return on investment and that creates a pressure mechanism for startups. Whether that pressure is healthy or unhealthy and whether it actually helps with results or complicates the process, it’s up for discussion.
Another point of contention with raised funding is that a startup’s relationship with the groups of angels does not stop at the financial level. Giving you the money immediately gives the investors a say in decision making, strategy and direction of the company. Each case and each funding scenario differs but investors will want to be included in the business in some shape, way or form.
If Not Angel Investing, Then What?
The avenues for gathering money for early stage businesses are not limited to angel investing. As discussed before, angel investing came about as an answer to the developing internet culture and the sudden climax of entrepreneurship. Gathering venture capital funds is only one option of a much wider investment network that can turn startups to experienced businesses.
A syndicate is a group of investors that put their funds and resources towards the same project. Unlike the typical angel investing route, syndicates are a more viable solution for small businesses as it is much easier to secure an amount of money from a larger group of people.
Furthermore, syndicates allow your business to gather intelligence, advice and contacts from a pool of experienced investors rather than a single person. That in itself is a filtering process for ideas and a way to look at problems and challenges from various angles.
Bartering is probably the oldest trading technique in the book and it might understandably sound archaic for the era we live in. Bear with us though because you’ll find that this blast from the past might actually offer some viable solutions. The idea here is to exchange products/services for products/services.
Let’s say that your company provides air-conditioning systems and is in great need of promotion and marketing. Why not approach a marketing agency and offer to install and maintain a new air conditioning system for their offices whilst they take on your marketing plan? This might not sound like investing to you but trade-in-kind will save a large chunk of your cash. Your budget can then be reinvested in other areas of the company.
Crowdfunding has a track record of success with small businesses. The model here works on funding-to-reward basis with people that decide to invest in a project, receiving a product or service from the business, once the investment mark is reached. The most well known platforms for this investment type are Kickstarter, Indiegogo, and others. Obviously, this type of funding calls for very specific projects and is not an immediate match for all types of businesses.