In this article, we’re going to shine a light on the complexities of working with an angel investor, discuss how it differs from conventional seed funding strategies and then provide you with some qualified tips on how to find an angel investor.
What is an Angel Investor?
The concept of an angel investor is nothing new. The term is likely derived from a name given to wealthy theatre lovers, affectionately called “angels”, who would privately fund failing theatrical productions on Broadway.
The modern angel investor is simply a person with the means to provide seed capital to a startup, in return for convertible debt, or ownership equity. While it’s true that these people are often retired executives or entrepreneurs with some extra cash stashed away, angel investors often involve themselves for more than just financial reasons. Many just want to stay up to date with a certain industry, while others may want to make use of a lifetime worth of skills and experience, in mentoring new entrepreneurs and future business leaders.
While individuals like this have been helping startups reach their seed funding goals for decades, angel investors have become more prevalent and accessible thanks, in no small part, to the meteoric rise of crowdsourcing. Having thousands of new business ideas and young companies in varying stages of development, all within the reach of a mouse curser, is a new luxury for smart investors.
Angel investors vs. Venture Capitalists
What’s the difference between angel investor and venture capitalists (VCs)?
Size of investment: Angel investors will invest, on average, between $25,000 and $100,000, whereas venture capitalists invest an average of $7 million per business.
Stage of investment: Angel investors assume far more risk, as they invest early on in a company’s life cycle, often when it just an idea, or during the development of a prototype or beta version. Venture capitalists commonly invest at the early stages of market entry, with the vision of rapidly growing market share.
Involvement: While most angel investors will certainly expect a position on the board, they may also offer to assist the owners by guiding the day to day running of the company and in important decision making. Venture capitalists will expect input on any matter with the potential to seriously impact the business and, thus, their investment. It’s not unknown for an angel investor to remain as a non-voting board member, even after VCs have invested.
Evaluate your business through the eyes of an angel investor
The internet has granted startups access to a pool of potential investors that is far larger and more diverse than they ever could have hoped for in the past. Unfortunately, having access to more potential investors doesn’t make your idea any more appealing. So let’s begin by taking a look at some of the steps you can take to make your business as attractive to angel investors as possible.
Don’t broadcast, target
While entrepreneurs now have great tools to help them reach a large number of angel investors, don’t take this as an invitation to throw your idea to the wind in the hopes that someone picks it up. Try to identify the type of person you believe would be interested in investing in your company and design all communications around that profile. Then, wherever possible, take the time to approach individual angels with your idea and present it to them with care.
Remember that you’re dealing with a person
While due diligence and detailed planning are still critical, remember that an angel investor is likely an individual with a personal interest in your company. As such, he or she may be interested in the goals of your company, above and beyond simply driving profits. Ensure that you clearly define any aspects of the business that could have positive results, like job creation or skills development, and include any community enrichment or humanitarian initiatives in your business plan.
Polish your business plan
Aside from its obvious value in terms of explaining your idea, a well-structured and critically evaluated business plan says volumes about the depth to which you have evaluated the feasibility of your idea. A detailed business plan will give an angel investor the impression that you are being realistic about the challenges you are facing and that you understand the market and your competitors.
Put your team in the spotlight
Remember that angel investors are often investing in people, rather than ideas. For this reason, its vitally important to introduce a potential investor to your team and to demonstrate how your collective skills amount to a great investment opportunity.
How to find an angel investor
Once you feel like you have all the collateral, documentation and important considerations in order, it’s time to start reaching out to potential angel investors.
Start with your existing contacts
Before even considering using croudsourcing sites, ensure that you have exhausted every possibility within your existing network. Being introduced to an investor through a mutual friend, or the benefit or working from an existing relationship, cannot be overvalued in this situation.
Use our list of angel investor croudsourcing sites
If no promising prospects emerge from your existing network, it’s time to employ the power of the internet to massively improve your reach. Below, we’ve compiled a list of the most popular crowd funding platforms that use an equity-based system. You’ll note that heavyweights like Kickstarter, Indiegogo and GoFundMe are notably missing from this list. That is primarily because investors on these platforms do not receive equity in return for their investment, thus making them unsuitable for targeting angel investors.
Note that this list is by no means comprehensive, as new crowdfunding sites are being established on an almost daily basis, and many other sites also offer equity-based funding, in addition to other investment models.
Site | Description | Number of Investors |
---|---|---|
AngelsDen | Designed with angels in mind. Great functionality helps investors find pre-vetted new businesses. | 12 000 + |
AngelList | A startup job portal/angel investor syndicate hub. Offers an easy funding application process for startups. | 3000 + |
Gust | An international SaaS platform frequented by a huge number of active investors. | 45 000 + |
Companisto | One of the largest equity-based European croudfunding sites with a large investor base. | 50 000 + |
EquityNet | One of the most successful sites on this list. Said to have raised in excess of $200 million in seed funding. | Dynamic |
Fundable | A crowd funding platform that's acquired some great educational websites for investors and startups. | 23 000 + |
FundedbyMe | A crowd funding platform through which numerous Northern European startups secured seed capital. | 61 000+ |
MicroVentures | An attractive platform for tech investors. All startups are vetted and the list is thus highly curated. | 28 000+ |
Seedrs | The first equity crowd funding platform to be approved by the FSA in the UK. | 30 000+ |
Conclusion
If you believe that an angel investor is the best source of seed funding for your startup, then it really will pay to take that into account in creating your pitch and your business plan. Indeed, the image of your business that you put forward should be designed, from the ground up, to appeal to a person, instead of a corporation. It’s a change that many entrepreneurs struggle to make intuitively, but one that modern, young startups should understand and implement if they are to survive in a changing business world.