Most businesses need to secure funding to survive. Or, at the very least to grow and have a stable future.
Around 90% of startups fail within the first year, and a further 60% of the businesses that did not fail in the first year will do so within 3 years.
The most common reason for most of these failures is the lack of funding. Startups have a number of funding options available, each has its own pros and cons. In this article, we’re looking at the benefits of angel investment for startups:
Why startups need funding
As explained, funding is make or break for most startups. Some of the main reasons startups need funding include:
Important assets – Without the right machinery, technology, and other assets, some businesses simply cannot compete in their market.
Hiring employees – Hiring employees is essential for most startups in their early stages. Paying employees is not something that can be deferred, startups need these funds upfront.
Legal advice – There are a lot of legal T&Cs that startups need to be aware of. Failure to comply with laws can result in costly fees down the line.
Marketing – A marketing budget is also essential to new businesses. If they can’t get their brand, products, or services in front of their ideal customers, they can’t make sales.
There will be some other requirements based on an individual company’s needs. But essentially, all and any costs associated with growing a business require funding before a startup is able to turn over revenue.
What is angel investing?
Angel investing is the term used for private investors, known as angel investors, that provide financial backing for startups, small businesses, and entrepreneurs.
Angel inventors are typically high net wealth individuals that look for opportunities to invest in new companies in return for an equity stake in the business.
They do this to add some diversity to their investment portfolio, and also because they are interested in helping out startups.
Anyone with the funds can be an angel investor. Although, the title is normally reserved for individuals that have gained the status of “accredited investor”.
Accredited investors are individuals with a net worth of at least £250,000 and earning £100,000 per year. Although, it’s not a prerequisite to be an angel investor.
Why seek angel investment?
There are a number of startup investment opportunities, but many startups seek angel investment for one or more of the following benefits:
- Angel investors can make a decision quickly and send funds just as fast.
- Angel investors will often have some expertise and contacts in the industry they’re investing in. This enables businesses to draw on some of that experience.
- There are no repayments or added interest.
- Business assets or collateral are not required to secure the funds.
As you can see, compared to traditional loans from banks and other financial institutes, angel investing is a lot more flexible.
What’s in it for the angel investors?
The advantages for startups receiving funding are obvious. It does raise the question as to why angel investors would invest in startups, however, as startups are among the riskiest investments.
It’s this risk and the fact that angel investors are buying an equity stake in a business that makes this form of investing so appealing to angel investors.
Startups are at the beginning of their growth curve. By investing early, angel investors are able to buy equity in a business that is going to increase in value as a company grows.
This is why investors typically invest in startups in that they either know about personally or know the industry well. They have an invested interest in helping the business grow as it means they will see a larger return.