A business idea without adequate funding is just that: an idea. 

Angel investors, though, are one of a few alternative sources who seek to turn that idea into a fully-fledged business. Typically: they’re high-wealth individuals with investing and business experience, and they’re called “angels” because they’re happy to invest during the early stage of a business – a phase many investors shun because of the higher risk of failure. 

In return for taking on that amount of risk, angel investors expect a higher return on their capital as compensation, which usually comes in the form of ownership shares in the start-up or convertible debt (a type of bond that can be converted into a set amount of shares at some point in the future).  

Having an angel investor on board can have its advantages. 

They typically come with a thick book of contacts, and they tend to be a lot more hands-on in the business than later-stage investors, so founders can tap into their experience for guidance during important decision-making periods. 

And because angel investors are individuals not institutions, founders can expect a quick investment decision compared to the time it takes financial institutions to approve a loan. But there’s always a flipside: in this case, it’s that founders often have to give up more control of the company to the angel investors and it’s costly as well. 

They often have to pay an angel investor a sizable chunk of cash over time in exchange for the time, money, and energy they’ve spent on the business.

There are other ways to access funding. 

Besides personal savings, bank loans, and borrowing from friends and family, founders could consider venture capital (VC) funding. They’re firms made up of professional investors, and they have multiple sources of funding including from individuals, companies, foundations, and both private and public pension funds.

Unlike angel investors, VC funds prefer to invest in later-stage businesses – unless there’s particularly compelling potential in a specific younger company.  And because VC funds spend so much time assessing each business, they tend to make a much larger monetary investment than angel investors. VCs almost exclusively focus on the growth potential of a business, as their top priority is to make the highest returns possible on their investment.

A few key factors will dictate which type of funding is best for a business: whether it’s early or late stage, the amount (and regularity) of funding needed, how much expertise is desired, and the amount of control the founder is willing to give up. 

If a founder wants to hold onto more control, loans from banks or friends and family could be a better choice.

The funding ecosystem has really evolved over the last decade. 

Crowdfunding – the concept of sourcing funds from retail investors online – has democratized funding, and there’s a growing group of non-traditional VC investors (such as mutual funds, hedge funds, and corporate investors) to choose from.