Disadvantages of angel investing

Each level of company involvement varies from investor to investor; however, it is not uncommon for an angel investor to have a certain amount of control in running a company. The entrepreneur may unwillingly be forced to give up some degree of control in order to meet their angel investor’s requirements, which can often lead to resentment on the part of the entrepreneur.

While the majority of angel investors truly look beyond the promise of monetary return, there are a few angel investors who are greedy and motivated by money rather than in promoting the good of the firm. These angel investors tend to be less patient with new entrepreneurs and do not provide any mentoring or guidance during a company’s early stage of development. To avoid such complications, it is crucial that an entrepreneur obtain complete information about the character and reputation of any potential investors before pursuing and agreeing to any terms.

The reason why most angel investors are less likely to make follow-on investments is because of the risk associated with losing even more money when reinvesting in an unsuccessful company. On the other hand, if we compare venture capitalists, they have a different approach to follow-on investing. They tend to spend approximately 2/3 of their funds on follow-on investments, taking the opportunity to allow companies to expand while diversifying their current portfolio firms.

At times, it seems not an attractive alternative to go for capital for the funding of business. It cannot be an alternative to venture capital all the time. May be if your business is not too small to go for angel  investors, then the match will never be fruitful and it will cause dissatisfaction to both the parties.

Cost is always a major factor for most of us. In exchange for providing the needed startup capital for a new company, many angel investors often require a certain percentage of stake in a company, starting at 10% or more, and expect a large ROI for their exit. From their perspective, this is a reasonable exchange since they are investing in very young and risky businesses that have not yet been established. In addition, angel investors may hire skilled professionals to ensure the day-to-day business operations.