Believe it or not, there are angels out there. For real. Not just the cosmic beings we often read in books and holy manuscripts, but real people who are ready to lend a hand, or a few thousand dollars, if you’re talking about business.
The angels who are willing to fund a startup or small enterprise, are known as angel investors, and unlike venture capitalists who are often all about the money, ‘angels’ function on a more personal level. An angel could be a rich friend, or even an affluent family member willing to invest not solely to earn a profit but to support someone they know and believe in.
There is still the matter of repayment of course, but it often materializes as either ownership equity or future profit. The money, however, wouldn’t exactly be called a debt and entrepreneurs won’t be held liable should a business fail. In a way, angel investing can also be seen as goodwill money, except that there’s still the possibility of a lucrative payout should a business prove successful.
How to find an angel investor
If you believe that your startup or business is suited to have an angel investor, then the closest place to find one could be close to home. There could be a close family friend looking to make some simple investments, or you may know of a family member you can contact, to help you out with the business.
The best person to speak with is usually someone who already has entrepreneurial experience, or already runs a business. This way, you don’t just get someone to invest in you, but also someone who can help you out with important business decisions.
Now, just because someone has agreed to finance your business, it doesn’t automatically mean that he or she can be labeled as an angel investor. According to Forbes, the Securities and Exchange Commission (SEC) describes an angel investor as someone who has a net worth of $1 million, or earning an annual income of at least $200,000 ($300,000 if married); an accredited investor, essentially.
This is the SEC’s way of protecting a possible investor who is not able to sustain the risk of investing, from shelling out money that he or she could eventually lose, should a business fail to perform.
According to Ralph Kroman of WeirFoulds LLP, in an article from The Balance Small Business, angel investors can also be described as people who are 40 to 60 years old, already has had experience (and success) when it comes to entrepreneurial experience, expects an investment deal that could last at least five years, has the ability to give business advice and even be part of the enterprise’s process. They should be able to invest a minimum of $150,000, but can also team-up with other angel investors, can refer the business to fellow (moneyed) colleagues or businessmen, is familiar with the business he or she is about to invest in and is quite active and on the lookout for a business to invest in.
Allan Riding, a professor at Carleton University and angel investing expert, said that these businessmen are always on the lookout for something new, but has the potential to grow. They also understand that the money they invested probably won’t be returned to them in the next seven years - and they are typically ok with that.
Now, to find these individuals, the best route is through various networking activities. If a friend or a family member can’t be your angel investor, chances are someone they know might be willing to take a chance on a budding entrepreneur.
It is also in one’s best interest not to limit the search for an angel investor to a single individual, because chances are, some angel investors come in flocks. The Balance Small Business says there are angel investors who operate as an informal group or network, so they can all share an investment. In a way, this makes them similar to venture capitalists. Some groups operate in local business development centers and there are those that you can easily find online.
Then there are those groups who act as liaisons to other angel investors, by matching them with startups and businesses. One example is the Angel Capital Association, one of the largest organizations for angels in the world. This group has over 1,300 accredited angel investors and 260 angel groups with accredited programs. They operate both in the U.S. and Canada.
According to the Telegraph UK, there are also online platforms where angels can invest directly, so they can take charge of raising funds for a new business. Some examples include AngelList and SyndicateRoom, and crowdfunding groups such as Seedrs and CrowdCube.
Since the SEC has set strict guidelines on who can be labeled an angel investor, some startups, or businesses, are missing out on the potential of getting backed by smaller investors. Through DATI’s Public Accelerator-Incubator (PAI) model, a platform which accelerates the potential of startups to raise capital by assisting with fast liquidity for early-stage and angel investors, even people who only have $10 or $100 to invest, can be part of DATI’s angel investing team. Aside from providing effective service for startups that seek funding, DATI also allows non-accredited investors to strategically put their money in an early stage, high-value fast-growth companies, that have the potential to become industry leaders.
Angel investors can also get the right information on where to invest through the PAI model. They now have access to certified and reliable investor information, which could help them further investing decisions, such as the insight into what new business ventures, that established angels are currently supporting.
Through DATI affiliated equity crowdfunding and social capital programs, everyday people can find the investment of only $100—sometimes as little as $10; comfortably affordable amounts for nearly all households. DigitalAMN creates a friendly investor environment for new players and allows angels and early-stage private investors liquidity from investments in as early as two years.
This has made it possible for everyday people to invest like the big leagues and offer them the chance at being successful investors in the future.
Now that we know who to tap, how do you pitch?
With the first part of angel investing done (finding your investor), the next and perhaps hardest thing to tackle is knowing how to effectively pitch your business or startup.
In the Telegraph article, it was suggested that the best way to start a relationship with possible angel investors, is to keep transactions warm and personal. Remember that you will be dealing with individuals who are likely using their personal finances to fund a new business, and showing that you personally appreciate the help, could go a long way in securing an investment.
Jenny Tooth, chief executive of the UK Business Angels Association, suggested to never approach a possible angel investor with just an idea. “We want to know that your business can be scaled,” she said.
What this ultimately means, is that it is not advisable to approach investors when you still have nothing to show. As a start-up or early-stage business, you should be able to show that your business concept could work and that you have already designed the right framework for it to be sustainable. This would lessen the fear of investor risk since they can already see the potential of your business going big.
Kate McKay, an associate partner, and general manager for Scotland, Galvanise Capital said that their group enjoys seeing pitch decks that are clearly validated. “Whether that’s using market research to tell us about customer size, competition, and exit routes, or some well thought-out and realistic assumptions about financials.”
She further shared that a pitch deck should have info on “possible problems, solution, team, competition, market, go-to-market strategy, what the raise will be used for and, ideally, a slide on high-level financials.”
Jackie Waring, chief executive of Investing Women, also shared a very important advice: “Entrepreneurs who react badly to feedback are usually not investible.”
So, be open to suggestions and see every comment as an opportunity to grow. More than the money, the success of your business could very well be dictated by your relationship with an investor.
And lastly, don’t look down on your business. Treat it with value and asses as well, why an investor would work well for your business. Think outside the fresh funding that they can provide and consider as well the advice, connections and client leads which can be brought to you.