So you’ve just came up with an amazing new startup idea that
can potentially change the world. You’re super passionate
about it and you know it will kick off, but now you realize
that you might need funding. Everyone tells you that you need
to raise your initial round of funding and find a bunch of
good angels, but now you’re like, “
Where do I start?”
These type of investors, otherwise known as informal or seed
investors, often support businesses in their early stages,
backing unproven but promising companies with the investor’s
own finances. Angel investors are also likely to provide
mentorship and advice along with funding for startup founders.
Although, just because these business relationships are more
personal than usual, doesn’t mean they are casual.
Angel investors carefully select where they invest their money
because of the potential for it to be lost if a company never
launches.
Another thing to keep in mind, not all angel investors are the
same. The range of quality among angel investors is massive
and can heavily impact your startup. While amassing capital
from any source can be very tempting, it does pay to do your
research and know the kind of investment partner you want to
take on for the long journey.
What is an angel investor?
Alright, let’s start off by understanding what exactly is an
angel investor and how they can help you.
We’ll go through a brief history class!
Angel Investors are individuals who personally invest in
startup companies to help them grow. This idea first began
during the 1920s in Los Angeles, when rich individuals began
to finance movies and earned the nickname “angel investors.”
As the substantial rewards and payouts became apparent, angels
soon began to expand into other fields of business and became
known as business angels.
While the exact size of the U.S angel investment market is
hard to calculate, as many investments are made on an
individual basis and therefore not subject to disclosure
rules, although research has shown that angel investors have
long since surpassed venture capital investments, and they
continue to grow as an option for financing startups.
Angel investors can be found in a variety of backgrounds and
usually invest in startups for personal reasons, or because
they’re passionate about a certain sector.
Startups can gain much more than just a cash injection from
the correct angel investor
, including industry expertise, insider knowledge of customers
and competitors, personal contacts and potential partnerships.
It’s especially useful for beginners and inexperienced
management teams, by serving as mentors. Angels can help your
startup survive through the early phases when success or
failure literally hangs in the balance and cover the negative
cash flow during the early stages that usually lead to the end
of a company.
How to find an angel investor?
If you are searching for an angel investor, a person whose
income or net worth most likely exceeds the threshold that
leads the Securities and Exchange Commission (SEC) to view
them as financially sophisticated and therefore exempt from
certain disclosure requirements and other forms of government
protection, then here are three choices on where to go:
1. Angel groups
2. Online platforms
3. Individuals
Locating an angel group
Without getting too into detail, the traditional way of
finding angels is through an “Angel Group”. Of course, we live
in a digital age now, and I’ll go over those other options
later in this article.
Angel groups are an organization of individual investors who
have invested together. According to information provided by
the Angel Capital Association (ACA),
there are nearly 250 angel groups in the United States
.
Some of these are set up as funds and others are loosely
connected networks, but because they are organized groups,
most of them have websites and a mechanism to submit a funding
request for them. As a matter of fact, the ACA conveniently
provides a
directory
that list more U.S based angel groups on their websites.
Online platforms
The most common method for finding angel investors with modern
technology is using online platforms. There are quite a few
out there and more and more are coming up.
Online platforms are websites that provide information for
startups seeking funding. Angel investors use these portals to
assess business in which they would like to invest. Some of
these platforms focus exclusively on accredited investors,
while others will allow entrance to non-accredited investors
invest. Furthermore, some of these platforms are curated and
select only a small fraction of submission for posting, while
others are open and merely make the information about startups
seeking financing available to potential investors.
Here are some of these online platforms you can look through
for angel investors:
Locating individual angels
Most accredited angel investors are not a part of an angel
group or online platform. Identifying appropriate individual
angel investors is much more difficult than finding online
platforms or angel groups. One of the best strategies to pull
off is to conduct an online search. Here are some websites you
can look through that can help you with finding these angel
investors:
AngelList:
One of the most widely known and used angel syndication
platforms in the US and getting more widely used in other
parts of the world. You can search by an individual angel or
angel groups and contact the lead angel to pitch them your
start-up idea. Information on how this process works and
founder case studies can be found
here
AngelList is actually way more powerful than just that. You
can look and post for jobs on the platform and even raise
money on the platform, but that will be for another post.
Syndicate Room:
Similar to Angel list, this is an online platform for angel
investors.
LinkedIn:
One of the best social media business platforms in existence.
A search of the term angel invests on LinkedIn can bring up
over 30,000 profiles and contains tons of groups you can join
for finding specific kinds of investors. Examining profiles on
this website can help you locate the angel investor you need
to finally launch that startup of yours.
Twitter:
Twitter is one of the largest social media platforms on the
internet and has practically everyone around the world
connected, and that includes angel investors. Simply inputting
the term angel investor in the search function will have tons
of angel investor groups and individuals show up. Reading
their profile on the side will also confirm if they are an
angel investor and usually contain a link to their website
where you can contact or continue to search for more
information about the person who’s caught your interest.
Events
Unlike venture capitalist events, which are often held in or
around large cities, angel investor events tend to be held all
over the country. With some time into planning, you will have
the chance to pitch your ideas not to one, but to hundreds of
angel investor searching for promising startups and
entrepreneurs. Some of the most popular angel investors event
this year include:
Is the angel investor legit?
One of the biggest problems most new entrepreneurs run into is
determining whether or not the angel investor is actually
legit. Is he serious about the deal or is he a waste of time?
Here are some key indicator questions that you should ask
before finalizing any deals with an angel investor, which
might be useful for you to consider.
Have they invested before in a startup?
The best indicator of an investor is if they have invested
in a startup before
. The time to make the first investment for a newly minted
rich individual is up to 21 months. Meaning if, in your
discussion with a potential investor, they have never invested
before, there is a high chance they’ll unlikely invest. Asking
them questions or even asking what companies they have
invested in before is a great way to know more about them.
Do they come referred as an investor?
The best network around is still word-of-mouth
. The best referrals for angel investors is usually not from
other investors but from other entrepreneurs. Even if an
investor decides to skip over on the entrepreneur’s idea,
knowing if they were respectful, consistent and fast in their
communication, the entrepreneur will refer deals to them.
Are they accredited?
When an investor has over
$1 million in investment capital, or if they
reveal they have over
$250,000 in annual income, they can be
accredited. Asking the angel investor for who their financial
consultant or tax consultant is a great way to determine this.
People who have that much have someone for both or either. If
they don’t, this is a sign that they are rather
unsophisticated when it comes to investing.
Are they involved and connected with the local startup?
Most interested angel investors are usually a mentor or
advisor for local startup hotspots
such as accelerators or co-working spaces. If they are not
connected, there is a high chance they are not going to
invest, since they don’t value such experiences.
What do investors usually look for?
Angel investors will usually reject around three-quarters of
investment proposals sight unseen, even though angel
investments are some of the most popular forms of funding a
business and angel investors are always seeking for new
opportunities to invest in sound, well-managed companies. How
do you get an angel investor to invest in your startup?
The potential for a solid return
Angel investing comes with a high degree of risk, so angel
investors have the expectation of doing more than just
receiving their money back when they invest in a startup. They
are searching for a higher return on their investment than
they can get on the stock market, for instance.
A good reason to invest
Keep in mind that most angel investors are or have been
successful entrepreneurs in the past
. They enjoy the thought of helping to grow and develop a
thriving startup. Although, there are three categories of
angel investors, the economic, the hedonistic and altruistic,
and each type has their own reasons for investing. While a
hedonistic angel investor is attracted by the excitement of
developing something new, an altruistic angel will be more
concerned over helping their community or enticed by the
potential of developing environmental technologies. Assess
which category of angel investors you are looking to entice
and tailor your pitch accordingly.
Just keep in mind, you’re not going to gain the attention of
every angel investor through your email, and that’s perfectly
fine. The important thing is that you do your research
beforehand to ensure you’re only emailing the investors who
are most likely to be interested in what you’re doing and then
concentrate on setting up that conversation.
Solid and experienced management team
A solid management team with leadership capabilities is very
important. An angel investor is investing into people, so they
need to witness that your business is in the hands of people
who are competent, knowledgeable, experienced and trustworthy
and possess the necessary skills to lead your startup to the
next level. For most companies, a complete management team
will have skilled, knowledgeable people who know about
marketing and selling products, managing people and
accounting.
A business plan
Angel investors will want to see a
business plan that’s both convincing and complete
. They want to see that you’ve created a vision for your
company and that you’ve given thought to the details of how
you’ll arrive there. They want to see things such as financial
projections, detailed marketing plans, and specifics about the
market.
Angel investors will want to see a
business plan that’s both convincing and complete
. They want to see that you’ve created a vision for your
company and that you’ve given thought to the details of how
you’ll arrive there. They want to see things such as financial
projections, detailed marketing plans, and specifics about the
market.
The opportunity to be actively involved
For a lot of angel investors, it’s not just about the money.
They will want to participate in developing your business.
They want to become a mentor or at times take an active role
in managing the business. This usually means that the angel
investor will have a seat on your Board of Directors.
Give them what they want
In short, if you want to get an angel investor to invest in
your startup, you have to ensure that your business is
prepared for investors. If you haven’t already done so,
preparing a solid business plan, restructuring your business
as necessary and completing your management team are the best
ways to prepare for enticing an angel investor.
SAFE Notes as an option
Once a founder has finalized their pitches, it time to talk
about numbers. One of the most important decisions for
founders will be having to decide on whether to opt for the
Pre-Money SAFE or the new Post-Money SAFE, the two
standardized legal documents that were introduced by Y
Combinator during recent years.
Both of these documents are meant to make the process quicker,
easier and fair for both parties in the early-stage
fundraising process. But there are major differences between
the two that founders should be aware of and examine closely.
The Pre-money SAFE is exceptionally favorable
among founders because it gets them pre-valuation funding like
a convertible note, but debt-free. The Post-Money SAFE
improves some of the terms for investors, such as locking in
their percentage ownership in a priced round later on.
All in all, the Post-Money version is
becoming increasingly more popular choice, especially if the
startup is raising around over $1 million, and the investors
have more leverage to ask for it during a negotiation.
Tracking ownership and dilution
With Pre-Money SAFEs, in order to evaluate money ownership and
dilution, you must consider the theoretical increase of shares
to the company option poll during a subsequent equity round.
Meaning, if the ownership and dilution values are more of an
informed estimation, rather than a guaranteed calculation.
This can cause uncertainty and confusion for the involved
shareholders, including founders, employees, and investors.
When it comes to Post-Money, in order to evaluate ownership
and dilution, you take away the theoretical increase of shares
to the company option pool from the equation and instead
consider the convertible securities (meaning, SAFEs, and
convertible notes) issued by the company. Essentially, what
you are doing here is calculating the price per share at which
the SAFE investor’s money converts.
Conclusion
Once you’ve gone through all of these steps, you should be
ready to pitch your idea to an investor. This is your chance
to really sell your idea, your beliefs, your company and
passion to investors. Hone your storytelling skills and
inspire them with your product. And remember,
it’s natural for potential angel investors to ask you a lot of
questions before parting with their money.
So be open when answering them, as securing funding will be
important for growing your business.
At
AngelMatch
, we understand all the pain points and struggles that you
have to go through in order to raise your first round. That is
why we created AngelMatch to give you the easiest way to find
a legit angel investor and take your startup to the next
level.
