When you are just starting up and you need money, landing funds from an angel investor can help you take your business to the next level. These wealthy individuals provide capital, advice and industry contacts to kick start your operations in exchange for an equity stake in the business. An angel investor will put your business under the magnifying glass and may only be willing to invest if your idea has high-growth potential.
TL;DR (Too Long; Didn't Read)
An angel investor is a person, business or group that provides financial backing for startup companies.
What Is an Angel Investor?
Angel investors, also known as business angels, use their personal disposable funds to invest in the growth of an early stage business. Most angel investors are high net worth individuals, usually with business experience, who have a broad know-how and industry contacts to share with the founder. This makes them an especially attractive source of startup finance. New companies are prone to failure, and the combination of financing and hands-on managerial experience increases the likelihood that a fledgling company will survive.
What Do Angel Investors Do?
Besides providing seed capital, an angel investor's main role is to strengthen the founder at the wheel. You can expect her to dig deep into the business plan, challenging your operations and growth strategy. When will you hire staff? How will you scale up your manufacturing? What is the most effective product launch strategy? An angel investor provides a real-time sounding board to help you think through the different strategic questions that might crop up along the way. Many will also act as connectors, introducing you to venture capital providers further down the line if you need it.
How Is an Angel Investor Different From a Venture Capitalist?
Most angel investors are in the game for something other than money, such as the chance to give back to the community or the chance to support a business idea that's close to the angel's heart. Ultimately, though, she is investing her own cash in your business, and her personal capital is on the line if your idea fails. For that reason, you can expect a business angel to be very active in your company, working hard to get your company off the ground. Be prepared to give her a seat on the board of directors and a say in the company's future decisions.
Venture capitalists, on the other hand, are investing other people's money. They have the potential to invest a lot more money in your business, so if you need an investment north of $1 million, it's worth speaking to a venture capitalist. The downside is that venture capitalists are much more profit driven and will only look at very high growth-potential businesses. The minimum acceptable return for a venture capital fund is somewhere in the region of 10 to 30 times the initial investment, which typically comes in the form of an initial public offering or buy out. A venture capitalist may steer you toward a big exit so they can realize large returns as quickly as possible.
When choosing between venture capitalists and angel investors, the decisive factor is often the maturity of your business. Whereas angel investors come on board very early in the process when your business is still in its initial startup phase, venture capitalists usually come on board much later, after you've proved that there's traction in your idea. It's much easier to pivot or abandon an idea entirely when you have collected $300,000, not $3 million, so a venture capitalist is unlikely to touch a company in the very early startup stage.
How Much Do Angel Investors Invest?
The typical investment is between $25,000 and a few million dollars per company, with a sweet spot between $150,000 and $1.5 million. Finance can take the form of a one-time injection of seed money or ongoing support to carry the company through difficult times.
How Do Angel Investors Get Paid Back?
Since the failure rate of young startups is so high, investments can easily be lost. Angel investors expect to be compensated for the risk they're taking, and it's customary to give an angel an equity stake in the company. This allows him to profit from a subsequent sale or initial public offering. Deals vary depending on the valuation, but most angels will take a minority share in your company in the region of 10 to 40 percent for a medium-sized investment. To a hardworking founder, giving away 40 percent of your "baby" might seem like a lot. However, if the startup fails – and most do – 40 percent of nothing is nothing.
Is an Angel Investor Right for My Business?
Angel investors only get paid back when they sell their equity. Because of this, they will be looking for an exit strategy – that is, a way to sell their shares at a later date for more than the cost of their initial investment. If you don't display this kind of growth potential, you are unlikely to attract an angel investment. Remember, you're giving up part of your company. If you're unwilling to hand over a big equity stake, you might want to consider another form of funding or explore options for buying down the angel's equity if you pay back the initial investment. There is more than one way to skin a cat, so be prepared to negotiate.
How Do You Find an Angel Investor?
Most angel investors don't wave their hands in the air shouting, "I'm an angel investor, come take my money!" because if they did, they would be bombarded with pitches. In any event, most business angels are not full-time professional investors. Rather, they are what the industry calls "DDI" – doctors with disposable income – although they may equally be dentists, accountants, lawyers, business founders and entrepreneurs who invest in companies on the side. The point is, they have a day job, so finding the right angel investor for your business may require a little leg work. Some ways to connect include the following:
Contacts and Networks
Most deals happen through informal networks. You may be surprised at the power of your own networks to connect you with wealthy individuals who are willing to take a chance on your idea. Lawyers, accountants and small business advisers often act as connectors. High-profile success stories like Whatsapp and Uber have motivated many wealthy individuals to consider angel investing in the hopes of getting high returns. Start by getting the word out that you're looking for investment. If you don't tell anyone that you're looking for money from angels, you may never find it.
Meeting and engaging with angels at startup workshops and angel investor events can give you some valuable face time. There are dozens of these events happening every week. A simple Google search for startup events should yield a range of options. Some will be industry specific, while others are put on by organizations that seek to match entrepreneurs with investors. Whether or not you meet an investor who will fund you, these events are essential to learn what angels are thinking and what you need to do to make a better presentation.
Some angels investors pool their resources so they can make a bigger investment. These syndicates tend to have websites where entrepreneurs can apply for funding. The Angel Capital Association is the professional alliance of organized angel groups in the U.S., and sites like www.angelinvestmentnetwork.us and www.gust.com frequently feature investors who are looking to invest money. Check these websites for local groups that will accept unsolicited requests for funding.
Do Your Due Diligence
Before signing on the dotted line, understand that angel investors must meet the Security and Exchange Commission's standards for accredited investors. In other words, the angel must have a net worth of at least $1 million and an annual income of at least $200,000. This is a useful point of departure for ruling out individuals who won't qualify as accredited investors.
How Do You Persuade a Business Angel to Write a Check?
First and foremost, an angel investor will be looking at table stakes. She will expect that you've invested, say, $10,000 or $15,000 of your own money into the business or that you've persuaded friends and family to back your prototype. This shows that you have faith in your business idea. Having skin in the game shows that you are willing to risk your own money and family relationships to make the business a success.
Obviously, an angel investor will be looking for a good business idea that has the potential to become very big. You'll need a polished presentation and a willingness to compromise on equity to close the deal. Just as important is the team that can lead the idea to success. An angel investor will be asking, "Do you have the passion, sales skills, business expertise, work ethic, respect and integrity to move this business forward? Can the founder take advice and learn from my experience? Is the founder really who he's presenting to be?"
Traditional due diligence is not feasible in the early stage of a business because there are no historical data to be meaningful. Because of this, you'll need a strong business plan containing a robust valuation. Potential angels will go over the books with a fine-tooth comb to check that you can justify the numbers and that they are not driven by wishful thinking. What kind of sales have you had in what period? What have you done to achieve traction in your market? Expect a would-be angel to spend a lot of time reviewing the business model, the product, your market logic, sales channels, revenue drivers, cost drivers, margins and more. She will be looking for reference models in the market to validate the approaches you've taken.
Who Are The Top Angel Investors?
As with any industry, there are big-name angels who dominate the scene and smaller, behind-the-scenes angels who you'll only uncover through personal networks. The top angels are serial investors with public profiles and thousands of investments to their names. In 2018, the most prolific angels by volume include internet entrepreneur Fabrice Grinda, Gmail creator Paul Buchheit, Wei Guo, who is the managing partner of UpHonest Capital and founder of Wei Fund and Reddit cofounder Alexis Ohanian Sr. Forbes maintains a list of the year's most prolific angels with their LinkedIn profiles hyperlinked to save you time in finding them.
Bringing a top angel on board is like getting a celebrity endorsement for your business. These people are powerful and well-connected. It goes without saying that they can afford to be very picky about those with whom they do business. If you're aiming to bring these powerful allies on board, Forbes recommends that you find a previous beneficiary of the investor's time and money and ask the founder to make an introduction. That's the best way to get your foot in the door.