How to Choose the Right Angel Investors to Fund your Startup
Finding angel investors is an excellent option when you cannot secure a small business grant or startup loan like SBA loans.
However, you have to pursue the right angel investor to fund your startup business. This requires substantial knowledge of who angel investors are and which to approach and request for funding.
Who Angel Investors Are and How They Work.
To simply state it, angel investors are individuals with enough money to invest in startups. I like to refer to startups as risky ventures. This is because many startups stand a great chance of failing when they follow a bad approach.
Angel investors are also referred to as angel funders, seed investors, or private investors.
Unlike business loans repaid with interests, these angel investors give startup founders money to kick off their idea. In return, they will own shares of the company—usually, a non-controlling share of about 5-8%.
The amount of money that these investors put into your business for a stated percentage of ownership will determine your startup’s worth from the beginning.
Let me explain…
Assuming that an angel investor invests $100,000 in your startup in exchange for a 5% equity stake. Your startup will be valued at $2 million from that moment.
Most startups request more funding after they kick off with funds from angel investors. This includes funds from venture capitalists and others, even IPOs (Initial Public Offerings). During these secondary funding rounds, you and angel investors would be giving away equity stakes at higher prices. Let’s say, 2% equity for $200,000, raising the company’s value to $100 million.
As your company’s value increases, the price of the angel investor’s stake follows. At a $100 million value, the initial investor’s 5% equity stake is worth $5 million.
Yeah, it’s a numbers game. But it depends on the value that you create as a business.
Please, these values are instances to aid understanding and your startup may be worth more or less.
What Angel Investors Are Not.
You already know what angel investors are from the section above. However, knowing what they are not will help you set your expectations. Expecting so much from angel investors can break your spirit if those things don’t actualize.
- Angel investors do not invest other people’s money. All the money they can give to your business is 100% theirs. So, this means there’s a limit to what they can provide for your business.
- Although most of them are experienced in various business ventures, they don’t expect themselves to tell you how your business should go. They are not your boss to direct you. However, they are happy to offer advice based on their knowledge and experience. Of course, they should. As your business grows, so does their investment.
- All in all, angel investors are mainly dormant members of your organization. They have little or nothing to with the managerial details of the business.
Difference between Angel Investors and Venture Capitalists.
- While angel investors provide small funding for a startup from personal money, venture capitalists draw from a pool of resources provided by teams of investors.
- Venture capitalists only invest in startups with the potentials for growth. This means that your business must have started before it can attract venture capital. Meanwhile, angel investors fund the startup when it’s in the idea stage or just taking off without any signs of growth yet.
- Venture capitalists provide far more than just capital. They offer technical and managerial assistance to the startup. Sometimes, they can even provide office space for the startup. Usually, a place that is most convenient and strategic to help the business grow and monitor the affairs of the business.
- Venture capitalists are strict. They are involved in the specifics of your business, and they usually have voting powers to influence serious business decisions.
Where to Find an Angel Investor.
These God-sent investors are not usually far-fetched. They are always around us, and they have a high affinity for good business ideas. Look around you; they are looking at you.
Family and Friends:
Many of us live in a neighborhood where there is a well-to-do individual. Most of these well-to-do people can have extra funds to invest in risky ventures. However, you should ensure that they understand the risks. You don’t want anyone running over you if things go south. Your family members and close friends could be handy targets in this case.
Whether they are friends with you or not, you need them. Usually, these set of people are advanced in age. They have accumulated vast wealth. And, of course, nobody gathers enough wealth. They are very receptive to great business propositions. That’s why they are wealthy in the first place. Approach them with your idea or business and seek funding. You can’t tell how it turns out.
Groups and Investor Communities:
Community building is everything in recent times. Even angel investors have communities of their own usually set up to provide crowdfunding for startups. Since most of these groups are region-specific, you have to find the right community of investors for your business and pitch them your idea. Example of these communities include:
- New York City’s Golden Seeds.
- Chicago’s Hyde Park Angel Network.
- Seattle’s Alliance of Angels.
- San Francisco’s Investors’ Circle.
There are numerous angel investor communities around the world. Do the diligence of researching your area and reach out to them with your idea or business to seek funding.
How to Choose a Good Angel Investor
Just like hiring your first employee, choosing an angel investor requires you to look at certain qualities.
Most of these seed investors are experienced in specific industries. Looking out for one that has the slightest experience in the industry that you’re venturing into will be a wise thing to do for many reasons. Their industry experience is a valuable recipe for sound advice when you need them. They are also more likely to invest in your business because they had grown fond of that industry and still want to stay involved as it changes.
While you pay attention to their experience, don’t neglect their track record. Do they have a record of investing in businesses that turn out successful in the future?
If they do, then you should consider pitching your idea to them. While you do that, try all you can to stay open. If they decline your offer, ask them what you might be doing wrong.
For investors like Peter Thiel, a track record of funding phenomenal startups helps them detect whether an idea is grandiose or practical.
The ideal angel investor enjoys advising entrepreneurs and love getting in the game now and then.
Usually, they are between the ages of 40 and 60. A few are always above 60, especially those that are retired with huge streams of income.
Talking about income, angel investors are usually wealthy people, but levels of wealth vary. Depending on the amount you need to get your business off the ground, a wealthier angel funder may be a better bet than an average one. However, make sure you’re not overestimating what is required to kick off.
Seeking angel funding is not the first thing to consider. Look into your savings and see how you get gift donations from family and friends. With these, you may be able to kick off your business idea, especially one that doesn’t require heavy funding.
Although it may seem like a good idea seeking angel funding or venture capital, it gets in the way of your ownership power as the business grows. Therefore, only seek this funding when you have no other means of financing your business.
Remember, “…the borrower is a slave over the lender.”
This also applies to angel investors even though the risks are well spelled out.