The term “angel" investor dates back to the early 20th century, referring to private investors who backed Broadway shows.
From the Great White Way to Main Street, it can be challenging to identify funding sources. Entrepreneurs who find it next to impossible to get a traditional bank loan may instead work to find angel investors—high net worth individuals who invest their own money in exchange for an equity stake—to help grow their startups. The trick is finding investors who want to invest in your company.
Below are tips to improve your chances of connecting with the right business investors to help turn your business dreams into reality.
Finding the Right Investors
What is an angel investor? Angel investors are business professionals, corporate leaders, entrepreneurs or even small business owners who are willing to take a chance and invest in a new company. According to the Center for Venture Research, there were 316,600 active angel investors in 2014.
An angel investor must meet the following accredited investor guidelines set out by the federal Securities and Exchange Commission:
- Individual—or joint with spouse—net worth of more than $1 million
- Individual annual income of more than $200,000
- Joint annual income of more than $300,000
The angel investor's value to an enterprise can be much more than monetary. Many angel investors, especially in the tech space, have relevant business experience and fully understand the risks going in.
A hands-on angel investor can help the entrepreneur see the bigger picture and avoid making the same mistakes others have made. While the investor may be prepared to lose their investment—as, on average, half of small businesses fail within the first five years—studies show that the more involved an investor is, the more successful the startup will be.
Friends and Family
The odds of finding an angel investor for your startup are relatively low. Entrepreneurs generally turn to their friends and family first to raise seed funding to launch their companies.
Before approaching your friends and family for money, make sure they know the risks and can take a financial loss if things go south. To ensure everyone is on the same page:
- Ask for the minimum amount that you need.
- Require each party to sign a document acknowledging that they understand the risks and that they may lose 100 percent of their investment.
- Have each investor sign a promissory note that spells out the repayment terms.
Before you've exhausted all your related funding sources, you may want to begin looking for investors to ask for angel funding.
Individual Angel Investors
It takes patience to find startup investors. Angels are not only investing seed capital in your company, but also making an investment in you and will want to know who you are before cutting a check. Relying on cold calling won't work.
The best way to connect with an angel is the old fashioned way: by networking. Find out who the investors are in your industry and get out there and meet people in your local community—accountants, attorneys, bankers—who can provide a "warm" referral (or personal introduction) to the right individuals. You never know when that connection will pay off and you'll be introduced to a person willing to make an angel investment in your company.
Today, entrepreneurs and investors use online databases like AngelList or Gust to connect with each other. While these tools are valuable, the best way to start a dialogue—with the ultimate aim of securing angel investing—is through personal contact.
An angel group—or angel network—is a group of investors who pool their resources to diversify and invest in a large number of companies. For entrepreneurs, angel groups allow them to present their business ideas to multiple investors at one time and attract larger amounts of capital.
- Meet regularly to review funding proposals
- Select entrepreneurs to make their pitches before the group
- Choose which startups to invest in
- Conduct due diligence
Angel groups are easier to find. The Angel Capital Association (ACA) is a professional alliance of angel groups in North America and its website has a searchable database of more than 400 angel groups. You can narrow your search by location and/or industry.
This is where your networking skills pay off. Don't forget to utilize your local connections to find a group in your community and then do a quick online search to learn more about individual investors, the industries they invest in, and the amount they generally invest.
Super angels are newer to the investment game, and combine some of the qualities of an angel investor with some of the qualities of a venture capitalist. They're usually individuals, but they invest other people's money, which allows them to invest larger amounts than angels.
Examples of super angels include Brian Cohen, chairman of New York Angels, and Ron Conway in Silicon Valley. What sets super angels apart are the number of companies they invest in, the size of their investments, and the technology startups they invest in.
While not much is known about the impact super angels will have in the investment arena, they do offer entrepreneurs another avenue to explore.
Finding an angel investor to take your startup to the next level can be challenging. The best angel is a high net worth individual with whom you've forged a personal connection and who is willing to take a risk and invest in you and your big idea.
The right angel can provide not only financial capital but also intellectual capital, and can serve as a mentor to help you and your business succeed. To access that funding and expertise, it's time to put your best foot forward and network.
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