Angel investors are individuals or networks of people who invest in new, small, or growing businesses to provide them with capital for startup or expansion. They provide a form of equity financing that grants them an ownership position in the company or, in some instances, they provide debt that can be turned into equity in exchange for either a one-time provision of cash or an ongoing injection of capital.
Why are angel investors interested in businesses like mine?
Angel investors are interested in opportunities that allow them to develop a business that’s capable of producing returns beyond what they might realize from other forms of investment. Many provide capital to businesses that may one day deliver annual returns of 25% or more, but some have much higher return requirements.
What’s the difference between an angel investor and a venture capitalist?
Angel investors are a subset of venture capitalists who may commit to a business before its concept is fully proven. In many circumstances, these investors use their own money to fund a business rather than investing through a strategically managed fund, an approach that’s common in other forms of venture capital.
Learn more about the nuances in our guide, Small Business Financing 101: Venture Capital.
Should angel investors be part of my funding strategy?
It depends. In the right context, angel investors can be a good source of capital, especially for entrepreneurs who can’t attain other forms of financing because of their size or the absence of collateral. However, there are several pros and cons you should consider before choosing this funding strategy.
|Angel investment financing has less risk than debt-financing options because it doesn’t require repayment if the venture fails.|
|Angel investors offer experience-backed advice and counsel where other providers of capital typically do not.|
|Angel investors can connect you with other venture capitalists, industry connections, suppliers, and partners who can help you ramp up quickly.|
|Angel investors will share in your business’s profits.|
|Angel investors will have a say in how your business is run, and it may not align with your style of management.|
Be sure to speak with a financial planner before choosing this or any other funding strategy.
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How can I find angel investors?
Most angel investors fall into one of the following categories:
Often, entrepreneurs locate angel investors through professional connections. You may find angel investors through fellow entrepreneurs, your attorney, your accountant, your banker, or online platforms like AngelList, FundersClub, or the Angel Capital Association.
How can I attract an angel investor’s attention?
Email introductions are perfectly acceptable, provided you share a mutual connection. Be sure to lead with who referred you to the investor and share a brief, to-the-point summary of what your business is, the traction it’s been getting, and the plans you have to take it to the next level. Attach an executive summary or pitch deck that explains the details of the opportunity and the ways you plan to use the cash you raise to accomplish critical goals.
If you have no connections to the investor, try building some. Network with people they may affiliate with by attending association meetings, seminars, or social functions that will provide you with opportunities to connect with a broad group of people.
How will they decide if my business is worth their investment?
Most angel investors will want to examine your business model, market, and industry, as well as your capacity to bring your idea to fruition, to look for opportunities to add value and realize significant returns. More specifically, angel investors want to see:
- Your passion, commitment, and integrity
- Your plan for market penetration and growth
- How your idea stacks up against alternatives in the market
- Proprietary information or intellectual property that will make it difficult for others to replicate your product
To understand the financial picture of your business, angel investors will ask questions about the capital you’ve raised and how you’ve used it, how you plan to use new injections of capital, costs, anticipated gross margins, and the assumptions you’re making about growth. They will also ask questions about your marketing approach, customer acquisition costs, and sales cycle to understand how you’ll position your product and get it in front of your prospective customers. Finally, they’ll ask about the people you have in place to strategize, plan, and run the business.
If an angel investor rejects your pitch, it’ll likely be for one of the following reasons:
- Your market is too small
- Your product will struggle to differentiate itself
- Your business or market doesn’t interest them, suit their area of focus, or align with their core set of competencies
- Your location is too far from them and their other businesses
- Your forecasts aren’t credible
- You didn’t demonstrate knowledge about your market or strategies for growth
- You weren’t convincing
- You approached them without being referred by someone they know
What are my other options for funding?
There are many other ways to raise the cash you need to start or grow your business. Learn more in our article, Your Go-to Guide to Raising Capital for an Acquisition.
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