Author:
Brian Tsang
Published:
May 15, 2024
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Angel Investors: How It Works, Pros and Cons of Using Business Angel Funding

This article explains using angel investors as a funding option, detailing its pros and cons.

  • What is angel investor / angel investing?
  • Why do businesses need funding?
  • How to find angel investors?
  • Advantages of using angel investors / business angel funding
  • Disadvantages of using angel investors / business angel funding
  • Alternative to angel investing: revenue-based financing
  • Is business angel funding a right choice for your business?

What is angel investor / angel investing?

Angel investors, also known as business angels, are high-net-worth individuals who put up funds for early-stage business ventures/startups in exchange for equity.

In many instances, angel investors have developed a personal or professional relationship with you (e.g. being a friend or mentor) prior to investing in your business. As such, they provide financial backing to your startup company because they have faith in you.

Why do businesses need funding?

Growth is a common reason for businesses or startups to obtain funding. Advertising, new hires and product launches — all these need money.

If growth and expansion are items on your company’s roadmap, then funding is something you need to learn about.

How to find angel investors?

Alongside finding friends and mentors who have a personal or professional relationship with you, you can also find angel investors through the following means:

  • Angel List: AngelList is a platform bridging startups and angel investors/professional investors
  • Angel Investor network/community in your country: for instance, Angel Investment Network has a network of 290,000+ investors based in the U.S.
  • LinkedIn: Professional social networks enables you to directly contact an angel investor

Advantages of using angel investors

  • No repayment: You do not need to pay back the funding.
  • Strategic support: Oftentimes, angel investors are also experts in your company’s industry. They may give guidance, share business know-how or open up networking opportunities for you.

Disadvantages of using angel investors

  • Equity dilution: In exchange for funding, business angels usually get a portion of your company’s ownership.
  • Loss of control: Angel investors have vested interests in your company’s growth. They may request board seats and take an active role in business decision-making.
  • Relatively small funding amounts: As individual investors, business angels usually provide smaller sums of money than their institutional counterparts.
  • Less structural support: Compared with institutional investors, business angels provide less structural support to your company.

Alternative to angel investing: revenue-based financing

Revenue-based financing (RBF) is an alternative financing method in which companies receive funding based on future revenue.

In revenue-based financing, RBF platforms provide funding to companies without getting equity in return.

Rather, RBF platforms would share a portion of your company’s revenue until a predetermined amount is paid back. Typically, the predetermined amount is assessed at the capital plus a small flat fee.

Pros of revenue-based financing

Flexible repayment

  • No fixed monthly installments.
  • Repayment is based on your company’s monthly revenue. You repay less if you earn less, repay more if you earn more. Total repayment is capped at the predetermined amount.

Non-dilutive

  • You do not need to give up ownership or board seats in return for funding.

Grow at your own pace

  • RBF platforms do not take part in management of your business, nor will they interfere in your decision-making process.
  • RBF platforms do not need to sell their stakes in your company in order to make money. There is no pressure for liquidity events such as merger, acquisition or IPO.
  • No covenants will be imposed to restrict how you use the funding.

Easy to apply

  • Most RBF platforms allow online application. No pitch deck or presentation required. (For example, Choco Up’s online application form only takes a few minutes to complete.)
  • RBF platforms make use of data integration and analytics to assess applicants’ financial performance. There is no need to prepare elaborate financial reports and projections manually.
  • No collateral is needed to ‘secure’ the funding.

Low cost of capital

  • The only cost of capital is a small flat fee.
  • No interest is charged on unpaid amounts.
  • No other fees are involved (e.g. loan facility fee).

Con of revenue-based financing

Pre-revenue companies may not be eligible. You need to have recurring revenue in order to apply for and repay RBF funding.

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In the past, startup founders and business owners were hesitant to raise funds from investors for fear of shared ownership or borrow money because of the huge financial pressure on repayment. 
 
By taking away the most unfavourable feature of equity financing, revenue-based financing has found favour with startup companies in recent years.

Following the ‘grow now, pay later’ approach, these companies get the funding first and enjoy flexibility in repaying RBF funding with a small percentage of their monthly revenue later.
If you want to learn more about accelerating business growth with RBF funding, leave us a message or sign up to get a preliminary offer now!

Is using angel investors a right choice for your business?

Unlike venture capital firms, angel investors are generally more willing to work with companies without strong track records, such as those in the proof of concept stage.

If your business is still in an early, pre-revenue stage, business angels may be what you are looking for.

On the minus side, finding an angel investor who trusts you and whom you trust is not easy. It may take months or even years to find the right fit for your business.

Besides, raising funds from angel investors has an equity price tag attached. Therefore, it would be best to consider all ramifications of this funding method before kicking start your search for business angels.

To help you compare angel investing and revenue-based financing, Choco Up has compiled the following table:

Angel investors Revenue-based financing
Application process Complex and time-consuming Simple
Repayment None Yes
Cost of capital High Low
Equity dilution Yes No
Loss of control Usually yes No

Interested in learning more about raising capital for your company? Check out the following guides we prepared for you:

Grow your business with Choco Up

Check eligibility

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