What is Angel Investing?
Angel investors prefer to get engaged at the “seed” or “angel” fundraising stage of a business. Meaning the angel often invests when the business is still only an idea.
After the initial round of investment, which typically comes from the founders themselves, their friends and family, or from bank financing, is when angel investors will enter the picture. Initial business finance is usually not very large; it’s normal for founders to launch their product or service with an initial investment of around $10,000. Their contribution is needed to grow a firm during a vital stage of growth, as the initial funding may run out and before venture capital groups show interest in partnering with a business.
Although contributions differ in size, funding levels can range from $5,000-$150,000. Some syndicates of angel investors might offer up to $1 million in capital for particular businesses. Typically, angel investors won’t own more than 25% of a company. Veteran angel investors are aware that the creators of the firm should possess the largest part in it since they will then have the most incentive to make it succeed.
Typical Investment Procedure
- Word-of-mouth, business and industry seminars, conferences, referrals from professional investment organisations, internet business forums, or regional events like chamber of commerce meetings are all ways that angel investors come in contact with young, developing companies.
- If both parties are interested, the angel investor will interview the founders of the startup company, look over business investment documents, and assess the sector it is aiming for.
- A term sheet or contract is created once a verbal agreement between angel investors has been reached. It contains agreements on the investment terms, payouts or equity percentages, investor rights and protections, governance and control parameters, and a potential exit strategy for the angel investor.
- You formally close the deal and the investment funds are released for the company’s use once the contract is finalised and a real legal agreement is prepared and signed.
Understanding Angel Investors
Although angel investors don’t always originate from the business sector, they frequently do. Frequently they belong to one of the following industries:
- Business professionals, including those in the fields of law, medicine, accounting, and financial advice.
- C-level corporate executives who have worked their way up through the ranks and are aware of what it takes to manage a profitable firm.
- Successful small business owners and entrepreneurs who have built successful businesses before and are able to spot startups with promising futures.
- Investors who specialise in lending money to small enterprises.
- Crowdfunding systems, which allow users to invest modest sums of money in exchange for a small portion of any future revenues, should the business be successful.
Venture capitalists versus angel investors
While both venture capital (VC) and angel investors (AI) provide funding for businesses in exchange for a share of the profits, there are important distinctions between the two. Both frequently invest in new businesses, but usually at various phases of the venture’s development. While most venture capitalists will typically need to see proof of a concept in hand, angel investors are more likely to agree on providing funding based on just an idea.
The funding source is another distinction. Private investors that use their own funds are known as angel investors. Managers of venture capital funds invest not only their own money but also that of other investors.
Additional distinctions include:
- Lower funding levels. Individual angel investors often write far smaller cheques, typically between $10,000 and $100,000, than venture capitalists, who typically write funding cheques of $2 million or more.
- Angel investors are more likely to maintain a “hands off” stance on company engagement. On the other hand, venture capitalists typically sit on a company’s board and are actively involved in its operations.
Read more about the distinctions between AIs and VCs here.
Benefits and Drawbacks of Angel Investing
Emerging startups may collaborate with angel investors for a number of reasons. Below we’ve listed the benefits and drawbacks to receiving funding from angel investors.
Benefits of Angel Investors
- No commitments. Business owners don’t have to pay the angel funder back if the firm fails because they haven’t requested a fresh line of credit and because the majority of angel investing includes stock deals.
- Angel investors frequently double as business owners. Angel investors frequently possess a wealth of business expertise.
- Less paperwork to process.
- Future cash infusions. When angel investors invest in a business, they frequently have the long view.
Drawbacks of Angel Investors
- Lack of control. Companies that engage with angel investors may have to give up some of their ownership stake. Although it’s typically a little sum, angel investors may decide they want a stronger say in business choices.
- Money. Angel investors want payment in exchange for their capital.
- Possibility for inexperienced investors. A major drawback of getting into angel investing is meeting a novice investor who gives bad advice or constantly asks business owners for updates.
Finding an Angel Investor
The procedure of locating angel investors is quite simple. Finding someone nearby should be your first priority because many prefer to be actively involved in the companies they back. Social networking is an additional resource for small enterprises looking for angel investment. Use the search function on LinkedIn, in particular, to identify angel investors active in your neighbourhood.
You must confirm that you have done your research and are aware of the person’s capabilities. There is indeed a lot of angel funding available, but you need to make sure it’s the proper funding. You need smart money; don’t just take anyone’s.
In a given year, a group of angel investors can review hundreds of company concepts, but only invest in about 2% of them. One must ensure that their company checks all the proper boxes in order to join that minority group.
Make sure you show up to pitching events because networking is required. Make sure there are actual angels present at the pitching events you attend, not just a large number of people. Before you apply, find out who will be present by asking the organisers.
Even better than larger events with thousands of attendees are occasionally smaller gatherings with a small number of angels. If you aren’t actually receiving additional value, don’t pay to pitch; in general, you shouldn’t be asked to pay to pitch.
Prepare your elevator pitch in advance so that you can fully describe your company in 30 seconds. You must be able to briefly summarise your company without getting bogged down in the nitty-gritty. Discuss your current level of traction and your goals.
Speak with “true” angel investors
Asking about the names of other companies the investor has backed is not something to be afraid about. If they are genuine investors, they will be happy to discuss their portfolio and investments with you. A less-active angel won’t be able to adequately respond to this question if you’re speaking with them.
That being said, an investor cannot be evaluated only on the quantity of investments they have made in a given year. Some investors invest more frequently since they do it full-time, while others invest less frequently or only occasionally in addition to their regular jobs in other sectors.
After a pitch event, hold off on adding an investor to your LinkedIn network with a standard greeting. Instead of sending the standard “Hi, I’d like to add you in my LinkedIn” letter to connect, give them a brief slide deck to remind them of your meeting. After you’ve shown them your pitch deck, see if they’d be interested in speaking further.
For a pitch deck, 10–12 slides should be sufficient.
Things that should be included are: your team, prior successes, your product or service, market, consumers, competitors, growth strategy, financial projections, and the amount of funding you’re seeking.
An angel will typically respond with some queries regarding the market or figures if they are interested after seeing your pitch deck. Don’t delay; respond to the questions quickly. Have a Dropbox folder where you’ve compiled all the specific facts about your industry and business. This way you can always be ready to share it with an investor. Be prompt, effective, and organised.
If an angel hears your pitches and determines it isn’t for them, they still may pass it off to someone else they know who could be interested. Because of this, great first impressions and even better second impressions are crucial.