Friday, May 6, 2011

When Angel Investors Are a Bad Idea

To most small business owners with a viable business plan, angel investors sound like the ideal, don’t they? After all, angel finance is the type that you usually don’t have to pay back (at least not immediately), and angel investors tend to have a higher risk appetite.

However, there are certain things you should be wary of, when accepting angel funding, and in this article, we look at what they are.

Angel Investors Who Want to be Hands On

Under certain circumstances, an angel investor who takes an active role in mentoring you, as well as providing funding, can be a great thing. That is, if you’re receiving your angel funding from someone who has made a success as an entrepreneur themselves, and who knows the ropes, so to speak.

However, there are angel investors out there who don’t know much about business at all, and if they decide to take a hands on role in your business, you should be cautious. Do you really want every business decision to be a battle between you and your investor? Be as careful when choosing an angel investor as you would any business partner, and you should be fine.

Angel Investors Who Demand Too Big a Stake

Most savvy would be entrepreneurs understand that the old saying ‘100% of nothing is still nothing’ holds true today, and that giving away equity in your business is often necessary, if you want to attract investors – angels or otherwise.

However, you need to make sure that the deal is still worth your while and giving away more than half of your company to an angel investor should give you pause for thought. Remember, when your company is a success, you want to have control – after all, you put in the hard work! So be wary of business angels who require too large a stake in your company for their participation.

Business Angels Who Can’t Afford to Invest

Business angels take all forms, and while it’s true that you might find an angel investor who has been a successful entrepreneur, and has a large amount of money set aside for investments, there are also times when we have to weigh an investment offer from a friend or family member.

It’s always tempting to take a potential angel investor up on their offer, but make sure that you evaluate their financial position carefully. If your angel funding comes from someone who cannot really afford to invest, and their situation changes, even a little bit, you may find that they start asking for their money back before you can afford it. That only makes everything a whole lot trickier for everyone involved, so make sure that you only take angel funding (and particularly large amounts of funding) from people who can honestly afford to back you.

Business Angels with Dubious Businesses

Many small business owners have found themselves faced with a dilemma: to take money to start their business from someone who’s businesses or income may not be completely legal. Remember, however, that if you’re giving that business angel a stake in your company, and they are ever investigated or tried for illegal activities, there’s every likelihood that you could lose your business. Make sure you only deal with angel investors whose businesses and financial dealings are above board, and you should be fine.

As you can see, while every small business owner thinks every angel investor is the answer to their prayers, there are times when you should exercise caution. Don’t jump into the first funding opportunity that comes your way, no matter how attractive it may seem. Remember that when you choose angel funding for your business, both you and your potential investor need to evaluate each other.

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