February 28, 2022
As an entrepreneur looking to grow your business, one of the essential resources you'll need is capital. Capital, or funding, can be obtained from various sources, including friends, family, bank loans, and personal income. But to successfully scale and boost your business rapidly, you may need more external sources of income. One such channel you can turn to is angel investing. This article discusses what angel investing is and shows you how to secure angel investors to help fund your business.
Who is an angel investor?
An angel investor is a private individual, often a wealthy person, who offers business equity financing. Typically, an angel investor has amassed some wealth from previous investments and is looking to help a growing company out with cash. Most angel investors are interested in your story as a business. Others are looking to cash in on a business with some future potential.
Angel investing is a form of equity investment. An angel investor gives you money in exchange for equity (part-ownership) in your business. But unlike venture capital firms – another common form of equity investing – angel investors invest directly. Angel investors may invest almost any amount of money, from a thousand dollars to a few million, depending on their net worth. However, they will typically invest smaller amounts than a venture capital firm.
As angel investors can invest nearly any amount, almost anyone can be one – including your friends, wealthy relatives, or business contacts. All you need to do is convince them that your business is the right place to invest. Because of this flexibility, angel investing presents significant opportunities to businesses that can take advantage of it.
What do angel investors look for?
Like any investment firm, angel investors need to be convinced that they are putting their money in the right place. This makes it your duty as an investor to explain why they should invest. The good news is this: since angel investors are private individuals, they are typically not constrained by the stiffer requirements of venture capital firms. Some investors want to help a friend; others are interested in your firm’s industry.
Typically, what angel investors look for in a business will fall into one or more of these categories:
A strong story
Angel investment is a particularly intimate kind of business relationship. So, you’d have more personal interactions with investors as they get to understand you and your business. Many investors consider the story of a business as a critical factor in choosing where to invest.
To ensure your story is a strong one, ask yourself questions like:
- What problems is this business set to solve?
- What challenges have we overcome as a business so far?
- What is this business set to achieve in the next few years?
- Why are we different from similar businesses in this industry?
- What motivates us as a team?
The answers to these questions are critical to capturing the interest of potential angel investors. The more angel investors key into your vision, the more likely they will invest in your business.
A viable business
As much as angel investors are willing to help you pursue your dreams, they look to make some returns. No investor wants to waste their hard-earned funds on an unprofitable venture. You'd need to demonstrate that your business is a fertile ground for their investments. To convince your potential investors, ensure you have adequate answers for these questions:
- How is our team going to meet the goals that we set?
- What makes our team capable of achieving these goals?
- What successes have we struck so far?
- What do our financials look like now, and what do future projections suggest?
- What KPIs have we notched so far?
- Have we tested a version of this product before? What did we learn?
- How will this product fit into the market if released today?
Angel investors prefer markets with nearly guaranteed high returns, as it assures them rewards on their investment. But having a business in a highly profitable market is not enough. Angel investors need to know that you have the right product and business model to cash in on the market. To show that you're prepared to take on the market, ensure that you can answer questions like these:
- How is your business model going to generate returns from the market?
- How do you intend to market your product to the market?
- What are the results of beta testing programs you've launched in the past?
- How do you plan to deal with competitors?
- What unique features make your product stand out from the rest?
A profitable exit strategy
Angel investors understand that they're in your business to make money. Most angel investors expect to have a big exit in 5 to 10 years, either from an IPO or equity sales. To grab their attention, you'll need to show that your business has the potential to be highly profitable in the future. Be prepared to answer questions like:
- How much is your business going to grow in the next few years?
- How profitable is the market your company is venturing into?
- What are your financial projections for the next two years?
- What are your plans to expand the business in the near future?
What to look for in an angel investor
Angel investors can be found almost anywhere. But just as not every business will suit an angel investor, not every angel investor will fit you. As a growing startup or business, you'll need to find an angel investor that will support your dreams. You need an investor who is in the right place to provide the necessary resources to aid your business in its rise. To determine which angel investor is the right fit for your business, look out for the following:
Expertise in your field
Investors who have some expertise in your field are probably the first option that should come to mind when you're seeking an angel investor. Such individuals have a better feel for your company's goals than a general investor. They tend to relate to your story more, because of their own experiences.
Additionally, they tend to be quite familiar with the terrain of the industry and turn out to be strong supporters under challenging times. Apart from capital, they can offer mentorship, advice, and instrumental guidance. Many of them will have important contacts and connections which you can leverage to build business relationships. For these reasons, it's a good idea to always consider reaching out to successful people in your industry.
A high level of integrity
Since an angel investor owns a part of your company, such an individual has a significant influence on the company's image. To ensure that your company remains credible to the public, you'd need to ensure that its investors are people of good social and moral standing. Conduct research on any angel investor you're thinking of approaching. Ensure that they are the kind of person you'd want your company to be associated with.
Angel investors are close business partners, and they'll likely influence the course of your business. You'll only want the very best for your company; this, indeed, also applies to your investors. Additionally, people with high integrity are less likely to take advantage of your relative lack of resources or run the company aground. You certainly do not want a murky legal battle in the future, so ensure you have only people of high integrity on your list.
Most angel investors prefer to invest in companies near them, both for convenience and due diligence purposes. Plus, the closer an investor is to your company, the more you can harness their expertise to boost your business's growth. For example, suppose your company is a tech startup located in San Francisco. In that case, you might consider investors from the Silicon Valley area. If you're running a fast-food chain situated in Manhattan, consider reaching out to investors in New York city first.
How to find angel investors
When you have determined what kind of investor you want, it's now time to find investors for your business. This might come across as overwhelming, but there are ways to go about it. This section describes how to find an angel investor:
Friends and Family
Your family and friends are often your biggest fans – they want to see you succeed. Many of them would see investing as helping out a close friend or family member. So, they might be the best people to turn to for seed investment in your firm.
While using this option, it is important not to approach it casually – it's a business agreement, not a private one. Have both your legal teams parse the documents to ensure that nobody's getting cheated. The outcome of this transaction may influence your relationship in the future, so you'd want to be in the clear from the outset.
Startup Funding Platforms
Today, there are several online funding platforms that connect businesses with investors they need. These platforms allow you to locate investors conveniently. Another advantage of these platforms is that they help you match with investors in your space, providing you with valuable mentorship for your business.
One of the most popular platforms is Kickstarter, which has currently processed $5.73 billion of successful investments. Another one of these platforms is Startups.com, which has helped around 2000 investors secure $500 million in funding. Approach the process on these platforms like you would any formal application. Present your best front and show investors how you would provide value for their investment.
Angel investor networks
Angel investor networks are groups of individual angel investors who collectively work to invest in startups. A critical advantage of these groups is that you benefit from a diverse pool of investors drawn from various backgrounds. Or, as Angel Investment Network puts it, they "bring together businesses looking for investment and investors with the capital, contacts and knowledge to help them succeed." Platforms like Angel Investment Network and Angel Capital Association have helped thousands of entrepreneurs in tech, software, finance, manufacturing, & other sectors to secure funding.
Search Fund Investors
There is a growing trend of search fund investors where investors will actually invest into a fund in order to help you acquire an existing business instead of starting your own startup from scratch. I mention some of the top search fund investors here.
How to approach an angel investor
Now that you've found an angel investor that's just right for your business, how do you approach them? This is a crucial aspect of securing an angel investment, as it is here that you make your first impressions. There are two ways to approach an angel investor:
Typically, the best way to meet an angel investor is through an introduction from a friend or associate of the investor. Such a person would help you break the ice by striking up a conversation. This provides a launchpad for more serious business discussions.
If the meeting is scheduled, be sure to do your homework beforehand by researching the individual. Your friend or colleague who introduced you to the investor has reposed confidence in you. Repay that trust by presenting your best front to the investor.
Although most entrepreneurs will prefer a friend or colleague to help make the initial connection, you might need to go this route to meet an investor. Typically, the investor would be a person you've researched and who you think would be an excellent fit for your company. If the person is on LinkedIn, browse their profile to understand them better. Your email to the investor must contain:
- A brief introduction of yourself
- How you discovered them – mention any referrals or events you both attended
- Information about your startup, what it does, and its progress so far
- Why you think they're an excellent fit for your startup
- A short executive summary
- Contact information
Pitching to angel investors - a step-by-step guide
The elevator pitch is the make-or-break part of the process of securing angel investment. At this stage, investors are given a reason to invest in your company or decide to move on. Here's how to approach the elevator pitch to increase your chances of getting an investment:
BEFORE THE PITCH
Know your investors
Review all information you have about your potential investors. Find out their interests, goals, and previous investments. Peruse their LinkedIn profiles to know what their professional affiliations look like. The better you know your investors, the more likely you will give them the information they find relevant.
Prepare your pitch deck
A pitch deck is a presentation made to convince investors to invest in your company. The quality of your pitch deck has a great impact on the outcome of the elevator pitch. Ensure that your pitch deck contains all the necessary information, is well-edited, and is visually pleasing. The typical pitch deck should contain the following:
- General information
- Target market and marketing plan
- Your team
- Future goals
Prepare financial documents
Unprepared or messy documentation is a turnoff to investors. Ensure that your financials and legal documents are in order. If you are unsure how to prepare documents like financial projections, you can try services like ours here at ProjectionHub. We help companies make financial projections based on your specific scenario assumptions as well as experience/data we've gathered from other financial projections we've done. With clear documentation and accounts, you are more likely to impress potential investors. And if you want to learn how to create your own set of investor-ready projections, watch this free course:
Rehearse your presentation
Practice your speech beforehand with a colleague. Work on your gestures and body language. You can also brainstorm ideas on difficult questions and how you'd answer them. Investors have limited time to spend, so you'd want to get your pitch right the first time.
DURING THE PITCH
Your appearance has a massive impact on how investors perceive you. You'll want to come across as someone competent enough to manage their funds effectively. Whatever style you choose, ensure it is neat and professional.
Talk with confidence
Confidence attracts investors and gives you a look of competence. Ensure that you control the pitch and use a straight posture. Practicing your pitch beforehand helps build your confidence.
Be prepared for tough questions
Investors are duty-bound to ensure that they're investing in the right place. Do not be surprised when investors ask tough or technical questions – it's part of their research. It would be best if you came prepared with your team to answer these questions. How well you do on such questions might significantly influence the outcome of the pitch.
AFTER THE PITCH
Stay in touch
After the pitch, some investors may make an offer on the spot. Others may take days or even weeks to respond after the pitch. In the meantime, ensure to keep in touch with the investor. A “thank you” email or follow-up call may be just what's needed to keep the conversation going.
Some pitches will be successful, while others won't. If you're unsuccessful with a particular investor, it may just be that they're not the right fit for you. Keep pitching until you find the right investor who believes in your dream!
How to maintain a good relationship with an angel investor
Securing funds from an investor is not the final stage of angel investing. You'll need to keep them positively engaged with the company. Here are a few tips on how to reach out to investors to maintain a good relationship:
Keep investors updated on significant events
Investors like to know how their investments are doing. So, share important events with them – significant milestones, successes, and failures. They'll appreciate your honesty and openness and become more willing to invest in the future.
Ask them to help in your business
As Jonathan Hung, a successful L.A. entrepreneur, puts it, "(investors') money is on the line, so they want you to succeed." If you need advice, contacts, or introductions, don't be afraid to appear needy or naïve. Asking for help shows that you're passionate about succeeding. This is a trait every investor likes to see.
Have regular one-up meetings
Angel investors are intimate business partners. Build your relationship with them by having occasional meetings with them. It does not have to be a formal setting – it might just be lunch at a nearby restaurant or a casual meeting. Regular meetings help strengthen your relationships with your angel investors.
Pros and cons of angel investing
Receiving funds from angel investors comes with some extra perks. But, like any other form of investment, it has its drawbacks. Here are some of the pros and cons of angel investing:
- Mentorship and advice
- Access to valuable contacts
- Networking opportunities
- Credibility from being associated with the investor
- Strategies and knowledge of the marketplace
- Help with future funding rounds
- Less capital than VC funds
- Terms can be ambiguous
- Your control as a founder is reduced
Finding angel investors for your business might be challenging, but the search is worth it. Angel investors offer a lot of value in getting your business into the limelight. With solid plans and the right partner, you stand a chance of achieving your loftiest dreams as an entrepreneur.