Every startup needs funding somewhere, somehow, and someway. Angel investing is one of the main methods of gaining needed funding.
Entrepreneurs who want angel funding will need to understand how to approach angel investors in order to secure the funds.
That's where all the question marks start to float around. What does it really take in order to grab the attention of an investor, to successfully pitch your idea, and to gain the big funding that you crave?
Here's how to get into the minds of angel investors.
1. Angel investors want to know the founders personally.
Old school investing was predicated on personal relationships. Today, with the mass expansion of investor channels, incubators, and groups, it's less likely that you'll be cultivating personal relationships in order to secure funding.
There are advantages to the impersonal model, of course. Without a friendship or family connection, you have less to lose in terms of a relationship. When it comes to money and family, things can get awkward and messy. Borrowing from family members is rarely a good idea.
In spite of the trend toward the depersonalization of funding, the best sources of money are still from people you actually know in some capacity and at some level. You may not be related. You may not be BFFs. But you've met them and they know you.
Having a personal relationship has the obvious advantages of dispensing with smalltalk and the time-consuming getting-to-know you phase. But there's an additional upside. If you have a personal relationship with the angel investor, they are more disposed to like you and to not fire you from your own startup. (It can happen.)
Angels who control a significant portion of the company may decide that you're not fit to lead the company and then decide to vote you out. While this is always possible, it's less likely to happen if you have a professional relationship with the investors -- a relationship predicated upon integrity and trustworthiness.
What should you do to gain such relationships? First, build a network. Take a close look at who's already in your contact list. Explore the possibility with your mentors, and be open about your interest in funding.
2. Angel investors want to see solid valuation.
Angel investors have established their risk threshold by becoming an angel investor and qualifying for the role through solid personal net worth ($1m+) and annual income ($200k+).
But most angel investors aren't wild-eyed risk takers, eager to throw tons of money at a "good idea." They want to see real money -- a solid and legitimate valuation that isn't skewed by a flimsy friends-and-family funding phase. (Over-valuation is a common pitfall in early stages of funding.)
According to AngelBlog, "Angels most often invest at pre-money valuations between $1 and 3 million dollars." By this point, the startup has established itself as something. It is a legitimate entity with real value, real customers, real revenue, and a fair valuation.
You are most likely to earn angel investment if you've already built a business that shows promise of a bright future.
3. Angel investors want a piece of the action.
Why would a high net-worth individual get involved in angel investing in the first place? Why not give their money to a successful fund manager, real estate, or some other publicly traded company?
Here's why. An angel investor possesses experience, knowledge, and a desire for involvement. That's why they're angel investors. Obviously, they see the financial upsides. An angel investor's interest in investing may be evident in one or more of the following ways:
- Mentorship. Often, angel investors have experience in the fields in which they're investing. Because of this firsthand knowledge, they want to give back by coaching the fledgling business or its founders. If you can gain mentorship through angel investing, you will do well to accept it. If you're a founder and the angel investors sees you as unteachable, you may lose the chance at their funding.
- Control. Angel investors aren't passive dispensers of cash. They want to join in the fight for success by taking control. They want to make decisions in board meetings, identify areas for growth, and steer the company in the direction they choose. In spite of their sanctified moniker, angel investors may not be all that angelic.
- Payout. Money is the engine that makes startups go. Angel investors are the pistons in this engine, and they want some of the benefit. Why did the early investors for Facebook, Twitter, or Google throw their money into the investment pot? Because they wanted an ROI. Today, these investors are sitting on millions or billions in equity, feeling rather smug about their choice to invest. That's the dream of angel investors. Typically, they invest not out of altruism, but from a desire for financial gain. Who wouldn't? Since this is true, your startup should show promise of profitability, and you must indicate that you're willing to share generously in the way that you invite them in, structure the deal, and dispense the rewards.
4. Angel investors want to see an exit strategy.
The angel investor needs to see something in the future of the business that makes their investment look promising. Most of the time, this will be a solid strategy, a roadmap, that culminates in a big money event.
A plan is a harbinger of success, but it is by no means a guarantee. Here's how the WSJ reports on angel investment success:
"In general, the only way you can make a profit on an angel investment--or get at least some of your money back--is if the company you've funded has an exit event, such as an initial public offering or acquisition. And that can take years to happen, if ever."
Few startups launch with this kind of eye to the future. However, in order to attract the focused attention of a deep-pocketed angel investor, you have to consider the issue, develop a solution, and drive towards success.
Conclusion
According to recent statistics, there are nearly 300,000 U.S. angel investors. The total of angel investments in 2012 was $22.9b.
That's a lot of money and a lot of angels giving it away. But there is also a lot of competition for that money. By understanding the traits and qualities that angel investors are looking for, you'll be poised with remarkable advantage as you pursue the funding.
What is your experience either as an angel investor or a startup seeking funding from angel investors?