An angel investor is usually sought after by a high growth startup company in need of early stage financing. Early stage financing is also provided to a startup company by a venture capitalist. However, venture capital is better suited for startup companies that need at least $2 million (or more). In fact, a venture capitalist prefers to invest larger amounts of money in startup companies with high growth potential. This creates a market of entrepreneurs that need venture capital but don’t quite meet the requirements of a venture capital firm. If your high growth start-up company needs less than $2 million in venture capital, angel funding may be for you.
Angel funding can serve as a bridge to obtaining money from a venture capital firm. That means money from an angel investor can help your start-up company gain the momentum it needs to qualify for funding from a venture capitalist. Great examples of this are Facebook and Google. Before you approach an angel investor, it’s important to understand how they operate. This includes how to find them, what type of businesses they invest in and what resources they can provide. In this blog, I cover all these things. After reading you’ll have a better understanding of how to raise capital from an angel investor for your early stage company.
Who Are Angel Investors?
It all depends on who you ask. Angel investors are identified in different ways. They are called everything from “fools, family and friends” to “wealthy people who provide capital to an early-stage company.” Simply put, they are people who invest in an early-stage company (before they’ll qualify for venture capital). These startup companies have the potential to grow fast and provide angel investors with a high return on investment (ROI). Sometimes a business owner will seek angel capital instead of venture capital. So venture capital is not always the preferred choice.
Angel investors are also “accredited investors.” They invest in businesses individually or as a part of an angel investor group. To be an accredited investor, an angel investor must have a net-worth that exceeds $1 million for the last 3 years. They can also qualify to be an accredited investor if they have an annual income of at least $200,000 ($300,000 if married) for the last 3 years. Accredited investors get their accreditation through the Securities and Exchange Commission. An angel investor group can is also comprised of accredited investors. It’s important to ensure you are dealing with an accredited angel investor when seeking angel capital. Accredited investors often have significant knowledge of angel investing and the risks associated. They also have access to other resources besides money. They may be able to assist you with:
- Hiring Employees
- Marketing & Advertising
- Accounting & Bookkeeping
- Building a Customer Base
What Does An Angel Investor Require to Invest in a Business?
An angel investment is private equity. Private equity is capital invested in privately owned companies in exchange for a percentage of ownership. A business owner must give up a percentage of ownership in their company if seeking an angel investment. Angel investors make a cash investment in small, young companies with high growth potential that don’t generate more than $500,000 annually. However, this doesn’t mean they don’t invest in small companies with higher revenue than that. Their goal is to make a cash investment early so they can take part in the growth of the company. They also want to have the best chance at getting the biggest return. Sometimes that means they have to invest in startup companies early!
The types of businesses an angel investor will invest in vary. They don’t stick to specific industries. Often times, the angel investor will not have professional experience in the industry of the business they invest in. What’s most important is the growth potential of the business. The management team is also important. Just like venture capitalists, angel investors expect the management team to be competent. A competent management team is just as important as the product or service sold.
What Do I Need to Have to Apply for Angel Capital?
Before approaching an angel investor a professional investment summary and full business plan should be written. The investment summary answers all of an angel investor’s questions in short form. A business plan gives them the full picture of how the business will operate, how the money is made and how they will get a return on their investment. The investment proposal and business plan should also outline the pre-money valuation. The pre-money valuation will give a potential investor an idea of how much the company is worth before they invest. Other components of a good investment proposal include:
- The product or service explained in simple terms.
- An brief overview of industry growth.
- How you will use any capital invested.
- Relevant information on your experience and background.
- How the business will make money.
- What kind of return the angel investor will get.
You investment proposal and business plan should be used to develop an investment “pitch”. The pitch should be under two minutes. It should cover why your business is worth an investment, why you need the money and the estimated return investors will receive. You should master your pitch. It may be the first thing you say to a potential investor after walking into a meeting with them.
Where to Find an Angel Investor
The right angel investor can be hard to find. However, there are websites online that match business owners with angel investors. These are called an angel network or angel investor directory. An example of an angel investor network is Gust. Over $1.8 billion in financing was invested in startup companies through the Gust angel investor network. Gust matches business owners to angel investors based on the type of business they own.
The Angel Capital Association has an extensive angel investor directory on their website. There is a difference between an angel investor directory and an angel network. An angel investor directory lists different angel fund groups and platforms like Gust. An angel network is a platform like Gust that match business owners with angel investors. I like the angel investor directory offered by Angel Capital Association because it lists all the platform and groups dedicated to angel investing (in specific areas around the country). I suggest visiting this directory (instead of doing a Google search) because it lists all angel funding sources (in the United States) in one place.
What to Do If You Can’t Get Angel Capital
If you don’t qualify for angel capital (or venture capital) debt financing may be your only option. In that case, LenCred may be able to assist you. The experts at LenCred will speak to you about your business goals and needs. This will help them determine what type of financing could work best for your business. The LenCred team specializes in helping business owners get unsecured business lines of credit. However, other financing options may be available. Contact the LenCred team for more information.
Sources: “Securing Startup Financing for Tech Companies” by BJ Lakeland, CEO of Lighter Capital, http://earlygrowthfinancialservices.com/securing-startup-financing-for-tech-companies/, Forbes: Professor Billionaire: The Stanford Academic Who Wrote Google Its First Check, http://www.forbes.com/sites/ryanmac/2012/08/01/professor-billionaire-david-cheriton/#3d83c3914b05, “Angel Investors and their Investments” by Ramon P. DeGennaro, CBA Professor of Business and Finance, The University of Tennessee, December 2010, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1784489, Funders and Founders, How Mark Zuckerberg Started: The Life of Facebook’s Founder”, by Anna Vital, http://fundersandfounders.com/how-mark-zuckerberg-started/, Securities and Exchange Commission, Office of Investor Education and Advocacy, Investor Bulletin – Accredited Investors, https://www.sec.gov/investor/alerts/ib_accreditedinvestors.pdf, Investopedia, http://www.investopedia.com/articles/financial-careers/09/private-equity.asp.