Starting a new business can be a challenging endeavor, and securing funding for your dream business is oftentimes what can make or break the entire venture. This is where angel investors and angel investments come in, as one of the typical ways many entrepreneurs obtain their funds. So read on for a breakdown of who angel investors are, what they expect, where to find them, and most importantly, how to collaborate with them to grow your business.
What is an angel investor?
Angel investors are named after the role they played as financial saviors. They first originated in the context of Broadway theater as key contributors to the arts, and later, a study by William Wetzel, a professor at the University of New Hampshire in 1978, highlighted their critical role in driving entrepreneurship in the U.S. as providers of seed capital.
Essentially, then, angel investors are wealthy individuals who are prepared to provide their personal funds to entrepreneurs or startups, in exchange for ownership stock in the business. Financial support from these high-net-worth people is often called angel funding, as they often offer timely financial support during the early stage of the business establishment–often before startups have shown any positive results.
How does angel investment work
Pros and cons of working with angel investors
When it comes to funding sources for startup businesses, funding from angel investors is consistently listed as the top 5, if not the top 3, of the major funding sources on business websites from developing countries in Asia and the Middle East to developed countries in North America and Europe. So here’s a quick overview of the pros and cons of angel investments to further understand this key funding source.
- Greater openness to risks
Angel investors typically have a higher tolerance for risks as they are fully in control of their own personal funds instead of being accountable to a group of bankers or investors such as with venture capitalists. This makes them more likely to invest in relatively new or even unorthodox, out-of-the-box business ideas.
Angel investors often invest in companies that are among their line of interest or expertise, hence it is highly likely that they possess certain in-depth knowledge of the particular industry. Even if the angel investors have no particularly industry experience, they are normally seasoned corporate professionals with acute business acumen and extensive networks that could prove valuable.
- Grants you access to their business network
In view of the mentorship role that an angel investor plays in addition to their financial assistance, the business can benefit not only from their experiences but also from their social networks. Angel investors may connect the company with a variety of useful contacts, from suppliers to clients to additional potential collaborators, who can help the business with things such as securing a solid supply network, more comprehensive information sharing, and greater market resource access.
- Pure investment
Angel investor funding is of pure investment nature. The angel investors are not looking for any payback in terms of fixed loan amounts and loan interests. In other words, even if the business goes bust, angel investors won’t ask the founders to return their investments.
- Personal commitments
Since the angel investors are spending their personal money in exchange for some equity in the business, they have a financial stake in the long-term success of the company, as opposed to a quick investment for short-term profits. As a result they are more willing to commit to ensuring the success of the business.
- Sharing management control
As angel investors claim a certain percentage of the stake of the companies they invest in, they are considered owners. And depending on the extent of their ownership of the company, they may either exercise a similar amount of control on the company as the founders, or they may even have the complete rights to fully preside over the entire decision-making process.
- High expectations
Just as angel investors are less likely to be deterred by higher business risks, they are also more likely to set much higher expectations too, and they come with expectations to see a significant return on their investments. As a result the businesses they fund may have to operate under more pressure. That’s why it’s important for entrepreneurs to first evaluate if the business growth can be in line with the expectation of angel investors.
How to find angel investors
Making contact with angel investments
1) Individual network / personal efforts
Since angel investors are individuals rather than capital funds or investment companies, there are possibilities to get to know them via personal networks, for example through:
- Personal circle of friends, family, and corporate networks: This may seem obvious, but it’s not just about whether those in your personal circle of relationships may be the angel investors themselves–the key thing here is about spreading the words through a trusted circle. The main goal is to enlist as many supporters as possible to help to spot the potential investors.
- Seeking advice from professionals and experts: Talking to experts related to the industry and professionals such as accountants or lawyers who work with startups may well open up connections to angel investor networks.
- Active involvement in startup-related events: Participating in relevant activities related to startups such as entrepreneur competitions or incubator programs serves as another great way to increase exposure to angel investors.
2) Official angel investors network
There are quite a few official and renowned angel groups available. The following are some of the most direct sources one may contact. Since angel investments will probably work most effectively via local meetings and discussions, let’s check out the list in terms of particular regions around the world:
AngelList: An international online platform that helps business owners find investors.
Angel Capital Association: Provides a list of approved investment platforms and angel organizations, chiefly around the United States region.
EBAN: The European Business Angel Network (EBAN) is positioned as a non-profit organization for the angel investment community.
BANSEA: Business Angel Network of Southeast Asia (BANSEA) is an angel investment network spearheaded by a group of Singapore-based angel investors. It bridges angel investors with newly launched startups in Southeast Asia.
For all other regions, use the above list as an inspiration to find the similar angel investors networks closest to your business!
Tips for networking with angel investors
- Look for ‘like-minded’: Similar to any other collaboration, working with angel investors is essentially comparable to seeking a partnership as they are going to have a share in whatever business they invested in. The most obvious sign of like-mindedness is those who are keen on the related industry or better still, the particular products or services offered by the business.
- Stay active and reach out: Approach as many potential investors as possible, hone your presentation and pitch skills through the process, and request necessary feedback whenever possible to improve along the way. This is not only to cast a wide net to increase the odds of meeting the right investors but also serves as an important learning curve to improve the business idea.
- Get ready: Do all the necessary homework on the business including the market outlook, challenges, and competitors. Many people may have some knowledge and understanding of the positive fronts of a business as these are what most entrepreneurs go after, yet normally only those who really understand the business inside-out can tell the threats and difficulties that may influence the businesses growth trajectory.
What do angel investors look for in a company?
While we all know that investors are essentially looking for profit, one may still wonder what exactly draws angel investors to a business venture? Here is the list of the main criteria that angel investors typically use to assess an investment:
- Businesses with exceptional development potential, that could allow the angel investors to see significant returns on their investment, usually within a 5 to 7 year time span.
- Higher returns compared to what the angel investors are able to get elsewhere, which is normally at least a double-digit percentage and can be even up to 50%.
- Dynamic business individuals who are fully committed to their ventures and who have established a strong management team with a shared vision and a well-thought-out business plan.
- The entrepreneurs should know their industry well and also come with in-depth market knowledge to prepare step-by-step development plans for the company including both growth and exit strategies.
- Willingness to learn and openness to ideas, criticism, and mentorship, and this also means being able to accept the guidance and suggestions from angel investors themselves.
How to raise angel funding?
Similar to other ways of raising capital investments, there are generally a few standard steps to go through in order to raise funds from angel investors. The following list offers some of the most common startup fundraising steps to increase your chance of securing funding:
Step 1: Get the network plan in place
This step is basically putting Section 2 above into practice. Begin by identifying the angel network or channels that one wishes to form a relationship with, before tailoring your approach to work with each one of them.
Step 2: Getting homework done
What’s important at this stage is creating an accurate and quick overview “pitch” that serves to grab the attention and interests of the potential investors. And make sure that the pitch can be backed up by a comprehensive business plan and financial data whenever requested.
An effective pitch should have the following topics covered:
- Products or services intro, including any positive testimonials.
- Strength of your products or services versus their relevance to the current & future market needs.
- Overview of sales and marketing results.
- Quick competitors review which draws a comparison with your products or services.
- The management team that is leading the company.
- Current financial data overview and the next 1-3 years’ financial forecasts as well as a ballpark figure of the required investment.
Bear in mind that entrepreneurs can also enlist help from the relevant professionals on any particular topics listed above. For example, financial data can be handled by trained accountants, while the sales and marketing info from the marketing experts. The goal is to ensure an “elevator pitch” that stays short and sweet yet enticing enough to catch the interest of potential investors.
Step 3: Initial meeting and presentation arrangement
The next step would be to arrange the first discussion and pitch presentation session. Provide at least two meeting timing suggestions to the investors, and aim to secure a face-to-face discussion or at least a video call to build up interactive discussions from the very beginning.
Step 4: In-depth discussions and negotiations
Once mutual interest between both parties has been established, one can move on to more in-depth discussions and negotiations on equity distribution, controls, and the funding structure. Conduct consistent and well-organized follow-ups to ensure both sides stay enthusiastic and eager to drive the startup forward.
For those looking to access funding for their businesses ventures, angel investment is a popular option worth exploring. This article gave an overview the nuts and bolts of angel investment, including the pros and cons of working with angel investors, where to find them and networking tips to get to know them, as well as the desired returns that angel investors look for, and key steps to help you succeed in the angel investment fundraising process. To discover more funding ideas and fundraising platforms, stay tuned to Alibaba.com Reads for more details.