So, you’re looking for investment for your business. You’re aware of angel investing and you’re doing your research into it. If you’re looking for insider knowledge, expert advice and a step-by-step guide to angel investment, then you’re in the right place because we’re experts at helping organisations secure investor funding.
This comprehensive guide to angel investors and angel investing answers the most common questions asked by those seeking investment. It also addresses all of the important aspects of angel investing that businesses need to know to prepare themselves for investment. It will help guide you in getting your business ready for investment.
Angel investing refers to the practice of investing money in start-up companies in exchange for equity ownership. Angel investors are typically wealthy individuals who provide funding to early-stage companies in exchange for a percentage of ownership in the company. They may also provide mentorship and other forms of support to the companies they invest in. Angel investing can be a high-risk, high-reward endeavour, as many start-ups fail, but successful investments can yield substantial returns.
An angel investor is an individual who provides financial backing for early-stage startups or entrepreneurs, typically in exchange for ownership equity or convertible debt. Angel investors typically have high net worth and may provide not only funding but also mentorship and industry connections.
Angel investors are typically used by early-stage startups or entrepreneurs who are in need of seed capital to get their business off the ground — or to support early growth.
Businesses like this don’t always have access to traditional sources of funding, such as bank loans or venture capital, and often turn to angel investors for support.
Not all startups and entrepreneurs need angel investors. Some businesses may be able to bootstrap, or self-fund their growth. Some may have other alternatives for funding such as crowdfunding or venture capital.
Angel investing and venture capital investing are both forms of private equity investment, but they differ in a few key ways.
Angel investing is usually early stage, high risk and low investment, while venture capital is later stage, high-risk and high-investment.
Angel investors typically provide funding to early-stage startups or entrepreneurs in exchange for ownership equity or convertible debt. The income for the angel investor comes from the return on their investment, which can come in the form of capital appreciation (increase in value of their ownership stake) or dividends (a share of the company’s profits) if the company becomes profitable. If the company is successful and eventually goes public or is acquired by another company, the angel investor’s stake in the company will be worth much more than the original investment and they can realise substantial returns on their investment.
An angel investor will be looking for a variety of things when considering whether to invest in a business. Key factors they consider include:
Angel investors want to see a strong and dedicated team in place, with the necessary skills and experience to execute the company’s business plan.
The investor wants to invest in a business that has a large and growing target market, with a clear and proven customer demand.
The business should have a unique product or service offering that differentiates it from competitors and gives it a competitive advantage.
The business should ideally have some form of traction, such as users, revenue, customers, or partnerships, which demonstrate that the business is on a path to success.
The business should have a sound financial plan in place, including a clear understanding of the costs, revenue, and potential returns on investment.
The investor wants to see a clear path for exiting the investment, such as through an IPO or acquisition by a larger company.
The investor’s values, interests and goals should align with the company’s vision.
The business should have the potential to scale up and grow in the future, providing a larger return on investment for the angel investor.
While these are some of the general things that angel investors look for, it is important to note that each investor may have different priorities and focus on different aspects of a business.
Angel investors typically invest in businesses at an early stage, often referred to as ‘seed’ or ‘startup’ stage. The company is usually in the process of developing its product or service, and may not yet have a proven track record of revenue or customers — it may be pre-revenue or generating minimal revenue. Investment at this stage aims to help the business get off the ground and support early growth.
Some angels only invest in businesses that are already generating revenue, have a product or service in the market and/or have a clear path to profitability.
It is important to note that there are also later-stage angels who invest in more mature companies that have already established a customer base and are generating revenue, but still require additional funding to scale their operations or enter new markets.
Angel investors invest in a wide range of sectors, but some of the most common include:
These are good guides for the general sectors angels invest in, however, many investors have different areas of interest, and/or might focus on specific sub-sectors within these and other areas.
In general, angel investors want to see a return on their investment, which can come in the form of capital appreciation (increase in value of their ownership stake) or dividends (a share of the company’s profits) if the company becomes profitable. The ultimate goal for most angel investors is to see their investment grow in value and eventually be sold at a substantial profit.
In return for their investment, angel investors typically want a percentage of ownership (equity) in the business. This percentage will depend on the size of the investment and the valuation of the company at the time of the investment.
In addition to equity, investors may also want to take a seat on the board of directors, which gives them more influence over the company’s direction and decision-making.
Some angels may also accept ‘convertible debt’ in exchange for their investment. Convertible debt is a loan that can be converted into equity at a later date, usually at a discounted price or at a valuation cap, which gives the investors more protection in case the company does not perform well.
As is so often the case with angel investment, each investor will have different expectations and negotiation terms for their investment, so it’s important for you to understand what you’re getting into and what you’re willing to give up in exchange for the investment.
There are several ways that businesses can find angel investors to invest in their business:
Many cities have angel groups or networks that bring together local angel investors. These groups provide opportunities for startups to pitch their business and connect with potential investors.
There are several online platforms such as Wellfound (formerly AngelList), Gust and DeckSender, that connect startups with angel investors. These platforms allow startups to create a profile and pitch their business to a wide range of potential investors.
You can also find angel investors through your own personal networks and by asking for referrals from other business owners or entrepreneurs who have already raised angel funding.
Incubators and accelerators provide mentorship and resources to startups and often have a network of angel investors they can introduce startups to.
Many entrepreneurial events such as pitch competitions, startup fairs and networking events, also provide opportunities for startups to connect with angel investors.
Finding an angel investor is not an easy task. It takes time and effort, and not all businesses will be successful in raising angel funding.
You should be prepared to pitch your business and be ready to answer questions and provide information about your company and its financials.
If you would like some bespoke and structured feedback on your current ability to raise angel investment, we can send you a 12-page tailored report completely free.
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Businesses typically need to go through an in-depth process to successfully secure angel investor funding. Steps can include:
A well-written business plan that clearly outlines the company’s goals, strategies, and financial projections is essential to attract angel investors. See our Business Plan Template
Angel investors want to see that the business has a dedicated and experienced team in place to execute the business plan. This can include advisors.
Angel investors want to see that the business has been able to prove that their concept is something the market wants and needs, and that they’re willing to pay for it. Ideally (but not always) they’ve already achieved some level of success, such as users, revenue, customers or partnerships, which demonstrate that the business is on a path to success.
The business should be able to present a clear and compelling pitch that explains the company’s value proposition, market opportunity, and financial projections.
Angel investors often want to negotiate the terms of the investment, such as the percentage of ownership, board seats, and milestones to understand what you feel is and is not on the table.
Angel investors want to see a clear financial plan in place and a path to exit the investment, such as through an IPO or acquisition. See our Financial Projection template.
Angel investors want to see that the business is trustworthy and transparent, so it’s important to be honest about the company’s strengths and weaknesses and to be willing to answer questions.
Raising angel funding can be time-consuming and may take several months to complete. Entrepreneurs should be prepared to make multiple pitches and follow up with potential investors.
It’s important for you to be persistent, be open to feedback and be willing to make changes to your pitch or business plan to make it more attractive to potential investors.
As mentioned, securing investment can take several months and each stage can take varying amounts of time. The process can also be quite complex, with each investor having different requirements, and it’s important for the business to be prepared and have a clear understanding of what they are getting into. An indicative process might be:
This includes developing a solid business plan, creating a credible set of financial projections, building a strong team, and identifying potential angel investors.
This involves reaching out to potential angel investors, either through personal networks, online platforms, or angel groups, to introduce the business and its value proposition.
The business will typically be required to make a formal pitch to the potential angel investor, usually in the form of a presentation. This is an opportunity for the business to showcase its product or service, market opportunity and financial projections.
If the angel investor is interested in the business, they will typically conduct due diligence to verify the information provided in the pitch and to evaluate the business’s potential for success.
If the angel investor is satisfied with the results of the due diligence, they will typically negotiate the terms of the investment, such as the percentage of ownership, board seats and milestones.
Once the terms of the investment have been agreed upon, the deal will be closed, and the angel investor will provide the funds to the business.
After the investment is made, the angel investor will typically take an active role in the business, providing mentorship, industry connections and support to the business.
1. Capital
Angel investors provide the business with the capital it needs to get started or to grow.
2. Mentorship and experience
Angel investors typically have experience and knowledge in the industry and can provide valuable mentorship and guidance to the business.
3. Network and connections
Angel investors often have a wide network of contacts and connections that can help the business to grow.
4. Validation
Securing angel investment can be a validation of the business idea and can help to attract further investment.
5. Flexibility
Angel investors typically have more flexibility in terms of investment structure and terms than venture capital firms.
Dilution of ownership
In exchange for the investment, angel investors will typically take a percentage of ownership in the business, which will dilute the ownership of the business.
Loss of control
Angel investors will typically want some level of control and influence over the business’s direction, which can be a loss of autonomy for the business owner.
High-risk investment
Angel investing is a high-risk investment, and many businesses fail to succeed, so angel investors may lose their investment.
Time-consuming
Raising angel investment can be a time-consuming process, and entrepreneurs may need to spend a significant amount of time searching for and pitching to potential investors.
Potential for conflict
Having multiple angel investors involved in the business can lead to conflicts and disagreements over the direction of the business.
It is important to note that each business and situation is unique and what may be considered a pro or a con can vary depending on the specific circumstances, and of course, perspective. You should weigh the pros and cons carefully and have a clear understanding of the potential impact of angel investment on your business before making a decision.
Not having a well-written business plan, a credible set of financial forecasts, a strong team and a clear value proposition can make it difficult to attract angel investors.
Not having a clear understanding of the time and effort required to raise angel funding and expecting to secure funding too quickly can lead to disappointment.
Not thoroughly researching potential angel investors and their investment history can lead to mismatches and disappointment.
Not building a strong relationship with angel investors, and not keeping them informed about the business’s progress can lead to misunderstandings and mistrust.
Giving up too much equity in the business too early in the process can dilute the ownership and control of the business, and can make it difficult to raise further funding in the future.
Not understanding the terms and conditions of the investment, such as the percentage of ownership, board seats, and milestones, can lead to misunderstandings and disappointment.
Not having a clear plan for how the angel investor can exit the investment and realise a return on their investment can make it difficult to secure funding.
The search giant was founded by Larry Page and Sergey Brin, who initially received angel investment from family and friends to help get the business off the ground.
Electric car maker Tesla was initially funded by angel investors, including PayPal co-founder Elon Musk, who is now the company’s CEO.
Social media giant Twitter was founded by Jack Dorsey, Biz Stone, and Evan Williams, and initially received angel investment from Odeo co-founder Evan Williams.
Online storage provider Dropbox was founded by Drew Houston and Arash Ferdowsi and was initially funded by angel investors, including Y Combinator.
The ride-sharing giant was founded by Travis Kalanick and Garret Camp, who initially received angel investment from investors including First Round Capital and Lowercase Capital.
The home-sharing platform was founded by Brian Chesky, Joe Gebbia, and Nathan Blecharczyk, who initially received angel investment from investors including Paul Graham, Ron Conway and Y Combinator.
The social media platform was founded by Evan Spiegel, Bobby Murphy and Reggie Brown, who initially received angel investment from Lightspeed Venture Partners.
If you read this article, you’ll be well on your way, though there is much to cover beyond it. Browse our articles and free resources for useful and insightful articles to help you understand exactly what angel investing is and how to secure it.
Angel investing is high-risk, high-reward. The potential rewards are high, with the possibility of significant returns on investment if the business is successful. However, the risks are also high, with the possibility of the investors losing their entire investment if the business fails. A great founder is all too aware of the risk the investor is taking on their idea.
Before agreeing investment, it is important to understand your potential investors’ risk tolerance, and make sure it matches up with your own.
It is essential to conduct thorough due diligence on the investor, including researching their background and experience, and getting references from their portfolio companies.
You must understand the terms of the investment, including the percentage of ownership, board seats, milestone expectations and limitations placed on your control.
Getting an angel investor is a long-term commitment, and it can take several years to achieve an exit, so be prepared to have to work with your investors for some time. Making sure your vision is aligned and you each have a strong rapport can be an important part of deciding which investors you want onboard.
I hope you found this guide informative and if you want to find out more about becoming an Investable Entrepreneur, you can download a free copy of my bestselling book here.