As a long-time advisor to entrepreneurs, and a former angel myself, I still find startups confused about the definition of an angel investor, and how and when to attract one. Angels are actually serious investors who invest their own money, versus venture capitalists who invest institutional money, or regular people who invest in crowdfunding. Thus they don’t live or fly above the clouds.
Despite the recent growth of crowdfunding, angels continue to be one of the major sources of financing for new ventures, so it behooves every aspiring entrepreneur to understand who these people are. You need to know why and how they invest, and then focus on the ones who are the best match for your startup. Here are some key points to consider in finding one for you:
- Look for accredited angels and groups rather than individuals. There are organizations of angel investors in most major cities, as well as national groups, starting with the Angel Capital Association. Make sure your angel investors in the USA are accredited as having an income of at least $200K in annual income and $1M in assets.
- Angels spread their risk by making multiple smaller investments. Typically, individual investments will be less than $100K, but a group of angels may syndicate multiples. Venture capitalists, on the other hand, rarely consider requests below $2M. For amounts needed of less than $10K, consider crowdfunding or friends and family.
- These investors are not looking for startups in the idea stage. Their interest is in a business which has proved the viability of a new and innovative product, and even sold a few already, and are ready to scale the business. Speculative ideas, research, and early development won’t appeal to them. For these you should look to friends or crowdfunding.
- They are attracted to “squeaky-clean” business images. Don’t expect angels to invest in business ideas that may have legality implications, or appeal to people’s weaker instincts, such as gambling or drugs. They prefer to fund innovation in known and existing business domains, rather than innovations requiring infrastructure or education changes.
- Most focus primarily on their own areas of experience. Angels are typically business professionals who have accumulated some cash from their own success and expertise, and they look to leverage that by helping you do the same. Thus they prefer local opportunities, similar to their own, where they meet regularly and contribute face-to-face.
- They expect a high return on a long-term investment. That means they are looking to buy a share of a company that can generate real profits over time – not a charity, social cause, or a get-rich-quick scheme. Since they know that most startups fail, their target return is ten times investment, so be prepared to talk cost vs revenue and product life.
- Decisions are based on the startup team vs the product. This bias is based on the belief that the right people make all the difference, rather than the right idea. Thus, with angels, early networking with potential investors and successful peers is highly recommended. Lead with your credentials, rather than with your technology.
- Document your plan and your financial projections. Angels look for entrepreneurs with the discipline to create a plan, including financial projections, rather than just talk and arm waving. Perhaps your friends and family believe in you, and will provide funding based only on your excitement. For later rounds with VCs, you need the detail anyway.
- Set a realistic valuation for your startup to attract angels. Remember than angels are buying a share of your company based on its value today, not some time in the future. A typical valuation for an angel investment is $2.5M, meaning a $500K investment will cost you 20 percent of your company. Successful valuations above $5M are rare for startups.
Above all, remember that angels are experienced business professionals, who have driven some success. They expect you to act with integrity, and always show respect for their position, just as they respect yours, since they were likely once in your position. They probably won’t respond well to hard selling, intimidation, large displays of emotion, or failure to do your homework.
Persistence and learning are seen as virtues by angels, so prior failures and rejection should be viewed as only a temporary setback. The most common rejection response of “come back when you have more traction” means exactly that, so don’t be too discouraged. Most entrepreneurs have found that attracting an angel who can help you is far more valuable than just the money.