¶ … funding for entrepreneurs seeking seed capital to actualize their business ideas. The said funding sources in this case include but they are not limited to angel investors, bank loans, venture capitalist, friends and family, etc. In this text, I discuss angel investing. In so doing, I will largely concern myself with the pros and cons of the same.
A few years ago, James Barnham turned down an offer from a group of angel investors to fund the launch of a device he had invented. At the time, Branham was seeking a total of £150, 000 from investors in a reality TV program, Dragon's Den. Barnham according to Singh (2009) terms his rejection of the offer the best decision in his life. The investors (dragons) had sought a significant stake in the venture in exchange for the seed capital. The term Dragon (in relation to the TV program) according to Rees-Mogg (2008) "means a rich person who invests in perhaps crazy, but also brilliant business ideas."
Pros of Angel Investing
To begin with, it is important to note that sometimes, funding can be hard to come by for startups that are not yet tested. In the words of Kaplan and Warren (2009), "angel investors are typically less demanding than venture capitalists and other institutional professional investors." In most cases, efforts to secure funds to either expand or grow a business could be hampered by lack of a solid track record or verifiable operating history. Angel investors can help a budding entrepreneur overcome this hurdle. For instance, in Nova-Flo's case, most of the dragons were ready to invest in Barnham idea. In should be noted that at the time he was floating his idea to the investors, nobody really knew of how the invention would be received in the market. Thus in the final analysis, his was a risky idea to invest in. Nevertheless, some angel investors were ready to fund it.
Added value is yet another advantage of angel investing. During the program, Theo Paphitis promised to provide his "time, effort, knowledge, knowhow…" in addition to the £150,000 Barnham was seeking (NovaFlo, 2007). Successful in their own right, most angel investors have more than just cash to offer to an up and coming entrepreneur. They also provide their expertise as well as business contacts. This could be critical for a startup. When it comes to other sources of financing, i.e. bank loans; the entrepreneur is left to actualize his business idea on his own once funding is availed.
Next, according to Cobb and Johnson (2012), most business ventures in their early stages do not have huge capital demands. For instance, Barnham was in need of only £150,000 to turn his invention into a profitable undertaking. This is an amount that the angel investors could have easily provided. In the words of Cobb and Johnson (2012), angel investors can fund businesses that do not require a huge capital outlay "using their own personal funds…"
Cons of Angel Investing
One of the key cons of angel investing that can also be deduced from the Nova-Flo case is that while some angel investors are genuinely interested in seeing the business succeed, some are largely motivated by the possibility of huge financial returns. As Cobb and Johnson (2012) put it, come angel investors could be somewhat deceptive. For instance, in the Nova-Flo case, one of the dragons refused to fund Barnham's invention on the basis that it would take him many years to get a good return on his investment (NovaFlo, 2007). Angel investors motivated by monetary gains in the opinion of Cobb and Johnson (2012) "tend to be less patient with new entrepreneurs and do not provide any mentoring or guidance during a company's early stage of development."
Next, it is also important to note that in some instances, embracing an angel investor could in the long-term turn out to be costly to an entrepreneur. This is more so the case given that in some instances, angel investors could demand a significant stake in the business in exchange for seed capital. Cobb and Johnson (2012) note that in some instances, angel investors could demand a 20% stake (or more) in the business. This is again clear in the Nova-Flo case as no dragon deemed anything below a stake of 40% a reasonable exchange (NovaFlo, 2007).
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