The angel investor is one of many funding options for start-ups.
An angel investor is mainly a rich person or body who invests in early-stage or start-up organisations in exchange for a certain percentage return or shares. S/he could be a successful individual, executive, and/or business owner with surplus cash to invest in ventures of interest. Though the angel investor invests for higher returns of/to profit, s/he presents a good funding option for start-ups and can be found through networking.
Related post: 6 Sources of Funding for Start-ups
It is worthy of note that the angel investor invests in the founder floating the business instead of the viability of the said business. So angel investing tends to provide more favourable terms compared to other lenders. It is more focused on helping the start-up take its first steps, and not on the possible profit that might be received from the business. The angel investor is the direct opposite of the venture capitalist.
Founders with angel investing will discover that this form of finance not only comes with the required funds but also strategic experiences, key contacts and mentorship that could benefit the start-ups. For angel investors are almost always entrepreneurs themselves or have been at some point in their lives. They understand the importance of funding to a business at its early stage. They can be business savvy and are less likely to get caught up in bottom lines and profit margins.
Where to Find Angel Investors
Networking events: Entrepreneurs desiring to go the angel investor route can meet potential angel investors through in-person, community/city, networking events where these individuals are likely to attend – conventions, business fora, conferences, workshops, fundraisers, etc.
Online platforms: Both local and international exist that can help connect businesses with the right angel investor(s). Platforms such as:
Social media: LinkedIn, Twitter, Facebook, etc offer another excellent avenue to find angel investors. On this front, however, founders have to post constantly about their business, the journey to its creation and reveal its progress. This way, founders can build a community/an audience and make an easy path to meeting investors.
Family and friends: The founders’ family and friends can present a great angel investor option too; for angel investing is all about relationships and trust. And those close to the founder are privy to unique characteristics and attitudes. But investments by loved ones have their downsides if the business venture goes south.
Acquiring an angel investor is half the work done for any start-up. There’s also the pitch needed to secure funding for the company.
What the Angel Investor Looks for in Start-ups
To increase the chances of pitch success, here are four things likely to secure the angel investor’s funds.
Management Team. Remember the angel investor invests in the founder rather than the business idea. So traits like strong leadership skills, adaptability and a sharp business acumen attract the angel investor to a founder and a leadership team capable of executing a vision.
A reason to invest. The angel investor invests for various reasons, and apparently, the most prominent angel investors fall into three categories – the hedonistic, the economic and the altruistic. It could be that the start-ups would make a positive impact on the community (altruistic). Or the angel investor is just investing purely for the monetary returns (economic). And lastly, the angel investor believes the start-up’s idea is disruptive in the market. Founders ought to find out about an angel investor’s investment habits before making a choice.
Is the start-up truly solving a problem? Angel investors are likely to invest in the next big thing as far as it is creating a much-needed solution in the immediate community and society at large. They want to be involved in something laudable, bigger than themselves. Not too many an angel investor want to sink funds into a commonplace product/service with little or no value or need to humanity.
An exit strategy. And one that is mutually beneficial. The exit strategy should be a part of the pitch as the angel investor not only expects this but also a thorough account of it. It serves as security to the angel investor, irrespective of the outcome of the business. In addition, the angel investor needs to know when to expect returns and how to mitigate losses as required. If the business succeeds to the point where it goes public, then the equity invested must be provided accordingly.
Some Pros and Cons of Angel Investing
1. Angel investing is more flexible and less formal than other kinds of financing for start-ups.
2. Angel investing support all industries because angel investors typically choose businesses that attract them.
3. Unlike a business/bank loan, angel investing comes with minimal paperwork.
4. And because it is not a loan, there are no monthly payments involved. The angel investor is repaid either when new funding is secured or acquisition occurs.
5. The angel investor comes into the business with not only money but also experience, contacts and networking opportunities.
1. Sometimes, getting an angel investor is not a straightforward process, regardless of physical and online angel investing platforms.
2. The informal nature of angel investing is a blessing and a curse as it can complicate negotiating the terms for the potential deal.
3. The angel investor expects rapid growth and a return on investment quickly. This might put pressure on the start-up to continue growing even if it is against its plans.
4. More angel investing means giving up more equity of the business, having less control of it, and may sometimes result in a power struggle between the founders and the investors.
5. Another double-edged sword of angel investing is the non-financial support which accompanies it – the expertise, the experience, the guidance, etc. These can be reduced if the angel investor has a hand in many start-up pies and is unable to assist as the founder would prefer.