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Entrepreneurship is all about setting up and successfully running a business venture for growth and prosperity. This noble undertaking involves a host of decisions that the entrepreneur has to make. After conceiving a business idea, necessary steps are taken to ensure that the business idea is fully implemented.
Business planning plays a major role in developing the business. During business planning the entrepreneur will take a great deal of time to make projections about the financial needs of the business as well as the possible sources of finances to be pursued in realizing the business dreams.
Angel investing is increasingly becoming one of the viable options for funding business ventures and as such many businesses have benefited from the huge amounts of venture capital those angel investors are able to contribute in running businesses.
This paper will discuss the critical role that angel investors play in the establishment and development of business ventures. It will also analyze the pros and cons of using angel investments as an alternative source of business finance.
Implementation of a viable business idea will normally require a great deal of capital and the ability of the entrepreneur to raise the necessary capital, the higher the chances of business success. Start ups are businesses at the initial stages and hence there are very limited sources of funds available to such businesses due to uncertainties surrounding their success.
Start ups will therefore depend largely on the owner’s capital and contribution from friends. Credit facilities from financial institutions and other lenders will normally require collaterals and this limits the chances of new business owners to secure such findings.
In recent times however, the entrepreneurs across the world have been able to get a lot of reprieve from venture capitalist that are willing to support a business idea to its implementation stages. A venture capital is a specialized form of funding that targets high risk high return investments with potential growth in the future.
The capital is commonly provided to business start ups that cannot acquire funding from the conventional credit and capital markets. Venture capitalists are unique in the sense that they provide both financial and managerial expertise to the business that improves the chances of success.
Venture capital comes from various sources that may include wealthy individuals with investment appetite in the targeted area of business and institutions such as investment banks and corporate orgaisations.The venture capitalist therefore assumes a significant level of control in the business through the share of capital and as well as decision making processes.
Although venture capital assumes different forms as mentioned above, wealthy individuals have come handy in the recent past to support new businesses and has formed a greater part of angel investors.
This form of investment has played a major role in the development of start ups as a larger percentage of venture capital has comprised of the angel investment options. This paper will discuss the pros and cons of angel investments as a source of venture capital.
Angel investments have become the new trend in the management of start ups and hence this form of venture capital has the potential of ensuring high levels of business developments and economic growth in any country. Angel investors allow small and medium scale entrepreneurs to acquire the necessary capital and hands on management expertise to run a successful business venture.
Preston (2007) defines angel investments as a mutual partnership between entrepreneurs and wealthy individuals who seek to benefit from the early synergies created by a new business idea and make substantial amount of profit as they assist the entrepreneur achieve his r her dream in a specific business.
The angel investors will benefit from the high levels of profit as well as capital appreciation while the entrepreneurs will be able to acquire cheap sources of capital and also get managerial expertise. This mutual relationship has led to high levels of success in start ups.
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Benefits of angel investors
The question as to whether small and medium entrepreneurs should opt for angel investors or not comes from the key benefits one is able to get from these sources of venture capital. The increased use of angel investments as an alternative source of funding is attributed to the following benefits that they provide to both the investor and the entrepreneur:
Angel investments have been found to appropriately suit the entrepreneurs who intend to start up new business ventures and as such no other source of funding is convenient to businesses like the angel investments. During the initial stages of the business a lot of resources will be required.
They range from financial, managerial expertise and technical skills. Angel investments are able to provide all these resources at a lower cost hence it has the best combination of resources that can allow a start up to grow.
Angel investors are normally spread across a financial district of any country more so in areas that have adopted new technologies. This makes the source of finance to be the most available.
Angel investors are normally driven by success in the business and hence they are keen to mobilize their resources to ensure that the business idea succeeds. They are however flexible and allows for alternative plans.
This is the best approach for any entrepreneur who starts a new business since success is not normally guaranteed. In this regards, the angel investors allows for flexible terms of engagement as opposed to the conventional lenders who demand for strict investment in the agreed type of business venture (Benjamin & Margulis,2005).
Unlike other lenders, the angel investors demand for direct engagement in the business management to minimize risks of losses. They can therefore provide valuable skills and experiences that allow the business to grow and achieve its goals and objectives.
The angel investors also concentrate on developing local businesses and hence they acts as agents of economic development at grassroots levels. This gesture allows entrepreneurs in this area to access capital and open up businesses in areas with minimal competition and hence the chances of success using angel investors are normally high.
Although angel investors have positively impacted on the development of new businesses, they present certain challenges to both the investor and the entrepreneurs:
Angel investors are success oriented and will strive to provide necessary capital for a successful start up. They will however pay little attention businesses experiencing difficulties since they are risk averse.
Although angel investors are easily available, they can sometimes prove costly due to the high level of control they exhibit I business and the fees they demand from the entrepreneurs. The entry of angel investors can therefore erode the mission and vision of a start up business (Shane, 2008).
Angel investors are not as popular as other sources of finances; this has particularly made it difficult for them to penetrate certain areas of economy.
Despite the little set backs associated with angel investors, they still have a significant role to play in the development of new businesses and can be a great tool in providing entrepreneurial skills to the youth. They also provide opportunities for self employment hence the idea of angel investments needs to be popularized in all nations.
Benjamin, G. & Margulis,J. (2005). Angel capital : How to raise early-stage private equity financing. Hoboken, N.J. : Wiley.
Preston,L.S.(2007). Angel financing forentrepreneurs: Early stage funding for long-term success. San Francisco, Calif. : Jossey-Bass.
Shane,A.S. (2008). Fool’s gold?: The truth behind angel investing in America. Oxford: Oxford University Press.