based on "Raising Venture Capital: Entrepreneur's View of the Process", by Freear, J., Sohl.J.E., and Wetzel, W.E., 1990;"Informal Venture Capital and the Financing of Small and Medium-Sized Enterprises", by Mason, C.M., and Harrison, R.T., 1995; and "Angel Investing", by Osnabrugge, M.V. and Robinson, R.J., 2000

Advantages of Business Angels

1. Business angels prefer funding high-risk entrepreneurial firms in their earliest stages being the major source of external funds for start-ups with high growth potential. Business angels fill the so-called equity gap by making their investments exactly in those areas in which institutional venture capital providers are reluctant to invest.

2. Business angels prefer funding the small amounts (falling within the equity gap) needed to launch new ventures.

3. Business angels make investments in virtually all industry sectors. Sector aside, however, it should be noted that what most attracts angels to an investment is high growth potential.

4. Business angels are more flexible in their financial decisions than venture capitalists and tend to have different investment criteria, longer investment horizons ("patient money"), shorter investment processes, and lower targeted rates of return.

5. Raising funds from business angels does not involve the high fees incurred when raising funding from financial institutions.

6. Most business angels are value-added investors in that they contribute their personal business skills to furthering young businesses and therefore may elect to invest locally to facilitate involvement. This free assistance and advice from an investor who, quite often, is a seasoned veteran of the business world is priceless for young entrepreneurs starting out and would not normally be affordable by other means.

7. The business angel financing market is more geographically dispersed than the formal venture capital market; business angels can be found everywhere, not just in major financial centers.

8. Obtaining money from a business angel has a leveraging effect in that it makes the investee firm more attractive to other sources of possible finance. Angel investments certainly heighten venture capital interest in such ventures.

9. Business angels are also instrumental thanks to the loan guarantees they offer their investee firms, in addition to the money they personally invest.

10. Angels are not averse to funding technology companies, which inherently come with high risks.

Disadvantages of Business Angels

1. Business angels are less likely to make follow-on investments in the same firm. Conversely, venture capitalists spend around two-thirds of their funds on expansion funding of their existing portfolio firms.

2. Business angels prefer to have a say in the running of the firm, which may force the entrepreneur to give up some degree of control. Some business angels may have limited expertise in running the particular type on investee firm they fund, making their contribution less value-added and more meddlesome.

3. A small minority of business angels may turn out to be "devils" who have self-serving motives for investment, rather than promoting the good of the firm.

4. Unlike many venture capital firms, business angels do not have the national reputation and prestige of a big-name institution, which can be crucial if the firm is successful enough to seek assistance from an investment bank for a private placement or IPO.