To raise funding from angel investors, you must know who angels are, where they invest, and if one might be interested in your company.
An angel investor is someone with wealth that prefers to invest into small companies and startups.
Angel investors are smothered in ideas from startups. That makes it difficult for them to be reached. To counter the issue of unsolicited requests, many angels have even created specific protocols which must be followed just to get a meeting.
Raising funds with angel investors today means getting your business into the right channel. You must be able to get their attention before you can do anything else.
“Passion is an excellent guide for choosing hobbies,” writes Brian Cohen in his book What Every Angel Investor Wants You to Know: An Insider Reveals How to Get Smart Funding for Your Billion Dollar Idea, “but less so for choosing a business.”
Any business owner can draw upon their own resources. You can borrow money, do some crowdfunding, or ask your family and friends for some cash.
When considering angel investors, none of these apply. Angels will expect equity in return for their investment.
The Basics of Angel Investing
If you are able to secure funding through an angel investor, then there is a 3-step outcome which follows after you finalize your agreement.
- You receive a check from the angel in the amount upon which you’ve agreed. The amount you receive many be a few thousand dollars to a few million dollars, depending on the needs of your company.
- You then exchange a portion of your business equity. The percentage that you have agreed upon becomes a reflection of the future profits the angel investor will receive. Some angels might offer a loan instead or ask for a royalty, though this is uncommon.
- You will likely have the angel investor sell their equity portion at a future time, often 5-10 years after the initial investment, as a way to create profits.
If your business happens to fail, the advantage of having an angel investor is that you won’t be paying back the investment made into the business as you would with a loan. Even if the angel owns 49% of the company, it still comes out to zero.
Is it possible for angels to lose on some investments? Absolutely.
If it works, the returns can be amazing. That is why so many small businesses and startups are looking for angels to get involved.
There are high risks involved. There are also high rewards.
For many small businesses, getting an angel investor onboard is a milestone. Marc Andreessen and Ron Conway believe this shouldn’t be the case.
“It’s often said that raising money is not actually a success, it’s not actually a milestone for a company. I think that’s true,” they teach in their course at Stanford about how to create a startup. “For some reason, founders get their ego involved in fundraising where it’s a personal victory.”
“It is the tiniest step on the way.”
The Growth of Angel Investing
Although angel investing has been around since the dawn of human business, the term was first coined by Professor Bill Wetzel of the University of New Hampshire in 1978.
Systematic implementation of angel investing, including the creation of systematic groups, began emerging around the year 2000.
In 2012, there were 170 active angel groups in North America with about 8,000 accredited investors. Today, there are more than 400 active angel groups in the United States alone.
More than 300,000 people self-identify themselves as angels.
More importantly, 55% of today’s angel investors were previously a CEO or a founder of their own startup.
In his book Angels without Borders: Trends and Policies Shaping Angel Investment Worldwide, John May notes that angels have multiple reasons to get involved with startups and small businesses.
“Some see themselves as mentors. Others want to develop new local economic opportunities. There are even angels out there who invest money as a way to build long-term relationships with fellow entrepreneurs.”
Women are becoming actively involved as angels more often today as well. About 1 in 4 angels today that are based in the United States are women, of which 30% have gotten involved within the past 24 months.
That percentage is higher than what you’ll find with venture capital firms, where as little as 5% of VCs are women in the United States.
There are some unique differences which come along with a female investor when compared to their male counterparts.
The Angel Capital Association reports that 51% of women consider the gender of the founder to be “highly important,” compared to just 6% of male investors. One-third of the angels who are women place more importance on the social impact of a business, which is double the number of men.
Women are also more likely to contribute less per check and are less likely to back up their follow-on investments. This fact, however, is more likely due to the issue that women are just starting to get involved as angels.
Angels vs VCs: Should These Terms Be Used Interchangeably?
If you’re doing some research on angel investing and venture capital, then you have seen angels and VCs used as interchangeable terms. Whatever advice you found from someone doing this should be discarded immediately.
Venture capital funding rarely involves a single individual. The entire firm is involved with the process. That means you are dealing with the Board of Directors, the stakeholders, and the people who are responsible to help your company continue its path of development.
VCs are professional investors. Their job is to find businesses with the highest growth potential. In exchange for involvement, they expect a large return on their investment.
Most venture capital investments involve larger sums of money. Eight-figure deals are not unheard of from a VC perspective. With that much cash on the line, the risks of a small business or startup don’t make a lot of sense.
Whereas VCs generally look for relatively more mature businesses that need capital for growth, angels are typically looking for very early-stage businesses which offer a lot of promise and growth opportunities. Although some angels may take a disciplined approach to their investing habits, the goal is generally also to make a positive change in some way that doesn’t involve money too.
There is also a difference in the time it takes for angels to get involved compared to VCs. Both investors like to do some due diligence and basic research about who you are. An angel investor often makes a quicker decision, while a VC might take several months to decide if an investment is right for you.
The Advantages of Working with Angel Investors
Angels like to see business opportunities where there is a lot of potential, but limited funding. That circumstance allows the angel to provide the fuel necessary to create growth.
That is the one primary advantage angel investors are able to provide. It should not be the only advantage you’re looking to create, however, when securing an angel investment.
For starters, angels provide a small business or startup with extra flexibility. When you’re looking to secure funding, financial institutions have strict criteria which your company must meet. You must be a certain size, bring in a minimum revenue threshold, and have been in business for a minimum length of time.
If you meet those criteria, you’re still limited on the amount of funding you’ll receive based on what the financial institution perceives as risk.
“Most angel investors are going to be actively involved with your business,” writes Brandon Gaille, founder of ByReputation. “You’ll be able to take advantage of their experience in your industry to begin building a solid brand… In many ways, an angel investor becomes a mentor that is willing to pay you to be involved.”
Angels have fewer criteria. They tend to prefer companies where the ownership is invested in the process. They’ll work in a wide range of industries to diversify their portfolio, looking for ways to turn your ambition into profits that are mutually beneficial.
A second advantage angel investors bring to the table is their network. Money is important to a small business or startup, of course, but connections have value too. Angels bring their own experience and contacts to your business, allowing you to find new partners, get new customers, or diversify the goods and services being offered.
“Many angels take pride in their ability to give back to their community,” continues Gaille. “You get to hitch along for this ride, helping people you might never get to help. Don’t underestimate the power of what this can do for your business.
There is also the advantage of funding availability. Young companies struggle to find funding routes. Most financial institutions will avoid a new small business or startup with less than 12 months experience. If you can secure lending, it will be at a high interest rate.
Angels are more willing to accept the risk because they’re looking for steeper returns. They don’t want to lend money to the successful businesses of today. They’re wanting to create the most successful businesses of tomorrow.
Gaille notes, however, that having a high tolerance for risk comes with a price. “Most angels will give you 5-7 years to hand out a return and they will put pressure on you every moment of every day to make that happen.”
The final advantage to consider is the success rate that angel investors bring.
Researchers William R. Kerr and Josh Lerner from the Harvard Business School, along with Antoinette Schoar of MIT, found that businesses funded by angels are far more likely to survive at least 4 years than firms not receiving such funding.
“Investment success is highly predicated by the interest level of angels during the entrepreneur’s initial presentation and by the angels’ subsequent due diligence,” the team wrote.
With performance and growth measured through website traffic and rankings, Kerr, Lerner, and Schoar found that improvement gains typically ranged between 30% to 50%.
The Disadvantages of Working with Angel Investors
When an investor decides to put up an investment when a small business or startup feels like all hope may be lost, it can feel like a lifeline.
It is important to remember that angels make investments because they are looking for profits. They aren’t trying to do you a favor. They’re trying to do themselves a favor.
That is why it is important to consider the potential disadvantages of bringing angel investors into your company before agreeing to an investment.
The primary disadvantage is the lack of control. Once you strike a deal, unless a loan or royalties are the source of funding, you are going to be giving up a portion of your equity. That means your angel investor is going to have some input on how you run your business.
To prevent losing too much control, you must outline what the angel is permitted and not permitted to do within the text of your funding agreement.
Gaille notes that this issue even applies to angel investors who take more of a laissez-faire approach to your company. “Even if you do have a hands-off angel, you’ll be accountable for the decisions you make- especially if they cost the angel money.”
For some businesses, the amount the angel is prepared to provide as an investment is a disadvantage too. Compared to a private equity deal or venture capital, angel investors might offer a small amount for a large equity share.
Most of the deals that are available through an angel investor are one-time opportunities. You’re not going to keep having investments come your way, even if you show strong profits consistently. That means you must be able to make good use of the funds from the investment.
There won’t be anything left if you run out.
Where to Find Angel Investors for My Business
The most difficult part of the angel investment process is to find an interested angel who wants to put money into your company.
Most angels keep a low profile. They prefer making investments that are close to their homes or professional network because this helps them be able to stay involved without making a huge effort.
According to research presented by the Angel Resource Institute, 75% of deals between small businesses/startups and angels occur within the same stage. Finding a local angel is worth the time it takes, as the same report notes that the average deal size in 2017 was $522,000 for strictly angel investments.
To begin looking for angels, create a profile on the web platforms which work to connect companies like yours to a potential angel. There are four solid sites to consider: AngelList, DreamFunded, FundersClub, and SeedInvest.
Look for local options on these platforms whenever possible to take advantage of the preference to invest locally.
You may also find that your state, province, or city may have its own local network for angel investors. The Angel Capital Association maintains an up-to-date list of current groups, including information about any preferences for investments and processes to follow.
Almost all major cities today have some type of angel network, even though some of them may still be informal. Although it is easier to look up potential angels on a website, stay local whenever possible.
During your search, it is likely you’ll discover that there are angels in your community which don’t refer to themselves in this way. You can often connect with these people through your local Chamber of Commerce, through industry-related conferences, or even your own professional network.
Connecting with a Potential Angel Investor
For most small businesses and startups, the most important part of this process isn’t finding the investor. It is the creation of an engaging pitch which stays true to the strategy and mission of your company.
Most pitches are about 60 minutes in length. You must take a creative approach, keep your potential angel engaged with the presentation, and be willing to make a strong first impression.
There are exceptions to every rule, but most angel investors tend to invest with their gut. If you show that you’re knowledgeable about your goods or services, have something valuable to offer future customers, and are an expert in your business and industry, then you’ve got a strong chance to secure an investment.
Richard Harroch, who serves as the Managing Director and Global Head of M&A for VantagePoint Capital Partners, has put together several dos and don’ts to consider when creating a pitch deck.
- Do include copyright information with your pitch materials, including language which says, “All Rights Reserved.”
- Do plan to have a demo of your product as part of your in-person pitch.
- Do tell a story that is compelling, interesting, and memorable which reflects the passion you have for your company.
- Do show that you’re beyond the idea stage by proving you have received early traction, interested customers, or partners joining your team.
- Don’t use slides in your presentation that are overly wordy because angels tend to have a limited attention span.
- Don’t offer extensive financial details, since that can be provided as-needed with a follow-up opportunity.
- Don’t use acronyms or jargon with your pitch that the angel may not understand or recognize.
- Don’t underestimate your competition and refuse to belittle them in front of the angel investor.
Murray Newlands, founder of Sighted.com, suggests that finding a vocal champion is a necessary first step before going into a pitch. That will allow you to connect effectively, draw in members of a group for a discussion, and then push them to consider the advantages and disadvantages of your small business or startup.
“Investors will want to contact you and ask questions even before your meeting if they really like your startup idea,” says Newlands. “Giving them open communication channels can cultivate your relationship, which can be a huge deciding factor.”
Honesty is more important than anything else. Don’t stretch out your business plan in an attempt to have your presentation meet the anticipated desires from the angel. Focus on creating a concept your angels can grasp, then demonstrate it in a way which communicate value and potential.
Gaille suggests that honesty should be a two-way street. There are times when an angel might be looking to expand their portfolio without the experience you need in return. “Everyone wants to have a diversified portfolio in order to protect their best interests,” he notes.
“Angels are no different… When an angel with limited knowledge comes into your arena, it can put you at a disadvantage even though you’ve got the investment you wanted.”
You must be prepared to provide an answer about the problems your company will be able to solve when approaching a potential angel.
As a final step in your pitch, it is important to show you angels a potential exit strategy. Offering one clear strategy shows you’ve thought about their needs before going into the presentation, which will give your pitch a higher level of importance.
How to Live with an Angel Investor in Your Company
If your pitch is successful, then you haven’t reached the end of the journey. You’re just getting started! One of the best things you can do is to talk with your angel to see how much they plan to be directly involved with the company.
You will want to take advantage of the experience that they bring. Most angels have already had successful business experiences. They are familiar with strategic decisions, can add direction to your pricing, and even help with marketing needs.
As Brian Cohen says in his book, “Even the smartest angels I know feel lucky if they are net-zero after a few years. The reality is that most startups fail, and despite what angels may believe about their ability to distinguish the winners from the losers, most angels, including me, aren’t that smart.
There are some angels who are fully supportive throughout the entire process as you build your company. Then there are angels who are in it for their own personal reasons.
Some like to use their position to prove their intelligence. They’ll criticize each decision you make, even if you’re following a suggestion they once offered. These are the angels you’ll want to avoid whenever possible.
Cohen says that for him, the best opportunities come from people who know to do their basic homework. “If founders haven’t done this basic homework before calling me,” he says, “I have to believe they will be just as lazy when it comes to calling prospects or customers.”
When you’ve received an investment, you must go all-in with the process. You can’t hide behind generic terms or half-truths. The angel investor is going to see your actual strengths and weaknesses. If you are honest about them during the pitch, then you’ll find life becomes much easier than if you were misrepresenting yourself.
Angel investing is always personal on some level. That’s why you want to be authentic, not some public relations concept you thought up in some back room.
Historic Successes with Angels and Startups
Although the average angel sees a success rate that hovers around 10%, there have been some historic successes angel investors have been able to create over the years. Entrepreneur put together a list of some of the best historic successes with Angels and startups in recent years, with highlights from that information shared below.
Aydin Senkut is arguably one of the most successful angels since 2000. Senkut started at Google in 1999, serving as a senior manager in partner development. He averages more than 10 investments per year, offering up to $950,000 to companies. His successful investments include Shopify and Weebly.
Over 40 of Senkut’s angel investment startups have been acquired by larger companies.
David Lee doesn’t invest as much as other angels, with some companies only receiving $25,000. Yet his experience in being involved in over 100 startups is something from which any company can benefit. His portfolio of angel investments includes Twitter and Foursquare.
Esther Dyson is one of the most active female angels that you’ll find out there right now, about 100 companies total in her portfolio. She is unique in the fact that her primary focus is on startups only. She invests up to $50,000, with her biggest successes involving Flickr and Evernote.
Then there is David McClure. He averages over 120 investments per year, with some as high as $250,000. He has one of the most far-reaching markets of any angel investor, with companies like WePay, bit.ly, Udemy, and TaskRabbit all part of his portfolio.
Before 2005, most angels were acting on their own. As angels have come together in the past decade to form associations, such as the Angel Capital Association, their success stories have started to grow.
As word has gotten out about historic returns like these, more angels are stepping up. They are taking their investing activities more seriously than ever before. That means there are more opportunities than ever before to find the right angel investor for you company.
In time, you might become one of those success stories as well.
Are You Ready to Take the Next Step?
Now you know who angel investors are. You know where you can find one. You know the structures necessary to create a successful pitch.
With the advantages and disadvantages included above, you can apply each key point to your company to determine if this type of investment is a good idea for your business.
Angels have become more professional with their investing habits in recent years. This has made them become more like venture capitalists than in previous years, but it is important to keep in mind the differences between the two types of investors.
If you do decide to pursue angels for an investment, the best place to begin is with local research. See who is available or interested in your community. Discuss with your team what type of investment you’re going to need. Then get your presentation put together.
An angel investor isn’t always right for every business. If you decide against bringing in an angel, then consider private equity, venture capital, or even an IPO to raise the funds your small business or startup requires.