True to their name, angel investors are doing wonders for entrepreneurs, startup owners, and the ecosystem in general. Due to startup success cases, the number of angel investors has increased rapidly during the last years. What’s the most important thing, the majority of angels organize groups to make more impactful decisions on investment and to lower the risks.
Nowadays, startup founders have a wide variety of choices. So, in this case, the success key factor is finding the right investor and successful pitch presentation.
In fact, being an angel has not only become highly profitable, but it also became a powerful source for innovations, jobs, and a primary source for funding and the key reason for some startup existence.
So, up next, let’s understand how individual and group angels work? How to find the matching angel investor? How does this raising capital differ?
It is not always true that an angel is usually an accredited investor. Besides, not all accredited investors are considered as angels. But they do have a common desire, spare capital, and, of course, reasons to invest in promising startups.
Although an angel investor is a general term, they usually are:
Wealthy individuals: These are the people with high net worth who are happy to back up good businesses with capital expecting to receive company equity in return.
Angel groups: This process slightly differs from the previous one. Angels investors join groups, which are called “syndicates“. This kind of approach undoubtedly raises both potential investment numbers and its accuracy. Formatting this kind of group implies contributing funds to the angel syndicate, after which a professional management team selects promising ideas to provide capital.
How angel investment works?
Normally, investors are required to meet the definition of accredited investors to be an angel. A certain net worth is required to become an angel. Even though the definition and level, accredited angel investors are those, who have $1 million net worth and have $200,000 income or $300,000 combined income with a spouse. As seed investments have a high risk of failure, angels are mainly looking for strong and committed teams who operate in a good market so that they could return their invested capital 10-15 times more in about a 5-year projection.
According to a Harvard report, angel investor funded startups have a higher chance of survival.
The advantages and disadvantages of angel investment
- Less risky than debt financing
- Angel investors would take the investment risk if the business idea is worthy
- Extra value in terms of network, connection, years of experience, and expertise
- Chances to ask for additional funds along the way
- Investment terms flexibility
- Loss of complete control as a business founder
- Giving 10-50% of your business equity
- High return rate expectation (might equal to 10 times)
Where to find an angel investor
Below see some ways to consider when trying to find investors that match your business:
- Personal introductions
- Attending pitching events
- Co-working spaces
- Accelerator programs
- Meetups and events
- Angel investor associations
Most early-stage startup founders often think the first step they need to take is to raise capital for the startup. The truth is, there are a lot of things you need to learn and consider before pitching to investors.
1. Decide if angel investment is the right choice for your startup
The type of investment largely depends on the business current stage. When considering raising capital for your startup, see all the investment types to understand which one will serve the best for your business needs.
2. Spend time to thoroughly understand angel investing process
- Angels choose startups to fund
- Angel investors provide support and mentoring
- Angel investors cash in.
3. Learn how due diligence is conducted
Due diligence implies an evaluation of the startup and its founders before funding. It can also include the market size, technology, founder experience, and character, use of funds, considering all the risks of investing in a startup, and much more. This process is required before making a decision about funding.
4. Get networked.
Networking often helps to find the right people or people in the investment community who are interested in taking a risk on your startup. If you have decided to raise capital from an angel investor, it’s all about networking events, meetups, conferences, Angel Groups.
5. Prove you have a solid management team
To cut in short, angel investors invest in people, teams they believe in. It is not necessary to have an already successful running startup that generates revenue (although it for sure will impress investors). What really matters is to persuade the investor that the team consists of the most relevant specialists who have the domain skill sets and other expertise to the venture.
6. Board of advisors formation
No matter how skillful or experienced the team members are, you still won’t have all the necessary expertise. A board of advisors can consist of people or mentors you trust. The only advice is not to rush into building the board. First of all, be 100% sure that all members are the ones who fit and are ready to contribute to the company growth.
7. Perform profound market research, which includes risk evaluation
Gaining a thorough understanding of your competition and opportunities is one of the most important components investors pay attention to. Investing is all about getting 10 or 30X returns from the investment, so investors need to be aware of all opportunities and barriers the business might face in the future.
8. Prepare a clean and simple pitch deck
The first impression matters. Always be ready for the elevator pitch, as it is the initial introduction to your business idea. What refers to the deck it should contain the business executive summary. This overview helps investors to see your business concept clearly.
9. Develop a scale plan
Investors always want to be sure you have a strategy to scale, as you are using their money. With a projection or scaling strategy, you have chances to persuade the investors to invest in your business.
10. Prepare a company exit vision
The final goal of each startup is to reach the exit phase. Some investors might look to sell after the company hits a certain growth level. When considering someone to become your investor, make sure their buy-and-sell or buy-and-hold strategy matches your company’s long-term vision.