Raising money for a new venture is one of the most difficult challenges in business. It’s so difficult, in fact, that many entrepreneurs find themselves praying for the cash they need to get their businesses off the ground.
Angel investors are often the answer to those prayers, but they’re not for every entrepreneur. Here’s what you need to know about finding and partnering with angel investors.
What Are Angel Investors?
Angel investors are typically wealthy individuals who provide capital for startups. They can be former business associates, seasoned entrepreneurs, part of an angel fund or simply affluent fans of your business idea.
One reason they’re called angels is that they’re typically willing to take a big risk on new ventures at their riskiest stages. These stages are very early on in the startup process, and companies seeking angel funding often need the cash to develop a product or at the very least a prototype. Angels typically come in before venture capitalists, who are hesitant to pump capital into a company without a proven product or business models. Angel investors willfully undertake risky ventures in exchange for convertible debt or ownership equity in hopes of seeing a relatively high return on their investments.
Angel investors are generally accredited investors, which, according to SEC guidelines, means they have a net worth of at least $1 million and make at least $200,000 a year (or $300,000 a year jointly with a spouse).
Are Angels the Right Form of Funding for You?
Whether or not an angel investment is right for you depends mostly on the stage of your company. As previously stated, most investors are hesitant to invest in companies in really early stages. So if your business model is unproven or your product is undeveloped, aside from a business loan, your only funding option may be an angel investment. A third option might be venture capital, but this type of funding is typically very difficult for early startups to attain. Let’s quickly compare angel investments with loans and venture capital.
Loans are debt instruments typically offered through banks. They give you capital in exchange for repayment by a certain date in addition to interest. While angel investors often seek equity in return for capital, some also loan money to startups in exchange for convertible debt, which differs from the traditional debt instruments offered by banks. Convertible debt can be converted to equity by the creditor, and this option often keeps interest rates lower for the debtor than that of a bank loan; it also lessens the time constraints of traditional business loans. In addition to this, some bank loans require a down payment of at much as 20%, and companies are liable for repaying the loan regardless of the success of their venture. In contrast, angel investors never seek down payments, and they assume the risk of their investment should your venture fail.
On the other hand, while they may occasionally offer investments in the form of a loan, venture capitalists most often seek equity in relatively established companies. They often make large investments (i.e. above $2 million) in exchange for part ownership of your venture. So if your company is fairly new, without a proven product and taking in very little revenue, an investment of this size will often leave the founder a minority owner, losing most of his or her company. On top of that, VCs often seek a seat on the board in exchange for their investment, which will further deplete the power of the founder if the company or its board is tiny. As such, both early startups and VCs tend to avoid each other, and new companies that look for VCs are often wasting time, money and other resources.
This, however, doesn’t mean you shouldn’t let a VC invest in your company; it simply means that they should be willing to make smaller investments in exchange for a smaller role than they might be accustomed to.
Finding an Angel
Before the internet, people found angel investors the old-fashioned way: networking. That’s still the case today, and oftentimes, angel investors who are already in your personal network can be the best kind because they’re familiar with your track record, your potential, and your work ethic and style. If somebody you know personally can refer you to an investor, this will also provide you a leg-up in terms of gaining the investor’s trust.
While meeting through personal connections is ideal, it’s not an option for everybody. The internet has helped connect people who would otherwise never meet. This has created tremendous opportunities for angels and entrepreneurs to connect and talk shop. The Angel Resource Institute offers a comprehensive list of angel groups in the United States, making it a good first step to finding an investor.
Other internet resources include the well-known AngelList.com, which lists startups that are looking for capital and lets angel investors pool funds to invest in those featured startups. AngelList is Silicon Valley-heavy, but there are many sites for local angel networks that focus on companies in specific areas. Finding them is as simple as Googling your city or state name and the word “angels.” New Mexico Angels, for example, focuses on startups in that state; similarly, Ohio TechAngels focuses on tech companies in that state. Other angel networks don’t focus on geography but do focus on business type. Minority Angel Investor Network, for example, focuses on minority-owned or minority-led businesses. Gaebler.com and the Angel Capital Association offer full lists of state- and region-specific angel groups and other valuable resources.
How to Pitch to Angel Investors
Conversations with angel investors can take a variety of forms, but one thing an entrepreneur needs to have is an elevator pitch.
An elevator pitch is a 30-second statement that describes a problem, how the business solves that problem and what kind of investment the entrepreneur needs to make it happen. Keep in mind that if your product isn’t developed, you may have to sell the investor on an idea or simply your potential, which is not an easy task. If you’re successful in gaining the angel’s attention, you may be on your way to the next step, a pitch deck.
A pitch deck is typically a PowerPoint presentation based on your business plan. Its slides should explain the concept, your product, its market potential and your management team. It’s very important to make sure that the slides (your “deck”) are interesting, informative and accurate. Use our guide to pitch decks or our article on raising venture capital for a more thorough look at creating a deck.
You’ll also need a financial plan to show to your angels during the pitch. This means putting a lot of time and energy into planning your business and forecasting the results in a detail. Not only does this show angel investors that you understand the language of business (and accounting), but it also helps angel investors see their potential financial returns.
Another thing you’ll need to demonstrate is the strong team around you. Although plenty of businesses start as one-person operations, companies seeking angel investors need to demonstrate that they have strong management, experienced team-members (with expertise that is relevant to your idea) and the right networks in order to convince angels to trust them with their money.
Angel investors are a crucial component of the entrepreneurial space. They can supply much-needed cash, expertise and coaching, but it’s important to recognize that they also put considerable money at risk and thus will want to have some control over the company and the decision-making process in order to protect their investments. If you’re willing to give up some ownership in your company, have a compelling concept that can produce significant returns and are willing to take advice that you may not always agree with, angel investors can be the leg-up that takes your company to the next level.