Question

What are the pros and cons of using angel investors and crowdsourcing as financing methods for a small business

Answer 1

Pros of using Angel Investors are as follows:

1. Angel investors are many a times seasoned and established entrepreneurs who are well versed with the degree of risk involved with the setting up of a small business
2. When the small-business takes a bank loan, then the bank expects the business to pay it back, irrespective of whether the venture is a success or not . Angel investors on the other hand function with a different mindset. They go ahead with providing the money that is required to keep the business functioning and, in return, they get an ownership stake in the business. If the startup becomes a success , then both tend to get the financial rewards. In the event of the business failing the angel investor doesn’t get paid back.
3. Angel investors pool in years of experience into the business and they are well versed with the details of starting a company. Angel investors are equipped to give advice and guidance in addition to providing the funds for the investment , an angel investor would be in a position to offer abundance of valuable knowledge

Cons of using Angel Investors are as follows:

1. Since an angel investor’s appetite for higher risk tolerance brings in with it huge and increasing expectations. They’re in business purely for the monetary returns, and considering that there is a considerable and substantial amount of capital involved ,there is obviously an expectation for a great payoff. It is absolutely normal for the angel investors to expect a rate of return which is 10 times of the amount investment in the beginning within s period of the first five to seven years. The pressure to deliver can be really enormous.
2. Even though there is no technical obligatation to repay the investor the money that they have put into the business there is still a problem in that. When the equity in the company is given as a part of the agreement , the business ends up giving away part of the future net earnings. The percentage of ownership an angel investor would normally expect would depend on how much they would be putting in the business. Care has to be taken to see that the amount of ownership the investor is requests for doesn’t infringe on the businesses’s own ability to make its profit
3. Angel investors often expect to take an active role in the decision making process that are concerned with and affect the results of the business. There is always an accountability to explain the reasoning applied behind each of the choices made by thye business.

Pros:of crowdsourcing financing

1. Crowdfunding requires a very low investment before you start the campaign..

2. Using a crowdfunding platform can help spread the concept and r idea. The platform often helps in promoting the campaign and the brand. This kickstarter enables them to get more exposure than others and is the best option when the attention of thev press is desired

3. launching crowdfunding campaigns can be fun and enjoyable. There is a lot of excitement around the launch and success of a crowdfunding campaign.

Cons of crowdsourcing financing:

1. Though the cost of crowdsourcing financing is much lesser than the traditional fundraising option it still require time to be invested in the project. The time required will be less than actually completing the entire project and then moving into marketing phase , but a campaign will still require time to be invested.
2. Though it may look very easy to launch a successful campaign. It cannot be taken for granted as. If there is no existing large audience, it will take a considerable amount of time to market the campaign.
3. An important point to be considered is that the failure of the campaign becomes very public and that would affect the business also adversely though failure is not the end of the road and so businesses will revise, improve and relaunch at a later date or continue their project with funding from another source.
4. When a crowdfunding campaign is launched ten the businesses end up promising something very specific to your backers. This promise in turn makes it difficult to change major features of the project during production. It is not correct to promise one thing, take money from people, and then not deliver.or deliver something else.