The Executive Suite: How to Find an Angel Investor for Your Startup

Wednesday, April 29, 2020

How to Find an Angel Investor for Your Startup

Does watching Shark Tank make you dream about finding an angel investor of your own? Well, stop dreaming and start searching—angels are real and not just found on TV.

In fact, the University of New Hampshire’s Center for Venture Research reports in 2018 that “The angel investor market saw an increase in market participation in more companies but at smaller amounts. Total investments in 2018 were $23.1 billion, a decrease of 3.4% over 2017, and 66,110 entrepreneurial ventures received angel funding, an increase of 7.4% over 2017. The number of active investors in 2018 rose to 334,565 individuals, an increase of 16%.”

What’s causing this? CNBC suggests investors have “deeper pockets” due to “the longest economic expansion in U.S. history, which has produced legions of cashed-out entrepreneurs looking to stay involved in the startup scene.” Plus, Shark Tank has shined a lot of light on the angel investing process.

Identifying angels

Angels are becoming more plentiful. According to the Angel Capital Association (ACA) angels are usually high-net-worth individuals (or groups of people) who invest their own money in startup companies in exchange for an equity share of the business. The ACA recommends you only work with accredited investors “who can add value to the company via high quality mentoring and advice.” Recently, says CNBC, “less-affluent investors have begun to participate in angel investing via equity-crowdfunding platforms.” (Check out the federal guidelines for this practice.)

The ACA says angels are often former entrepreneurs who make investments for various reasons, including:

To make a return on their money
To participate in the entrepreneurial process
To give back to their communities by catalyzing economic growth

And they add, angels often invest locally or regionally, since they tend to want to be involved in the company.

Are you angel ready?

Getting angel capital is not for every business owner. The ACA advises you ask yourself these questions:

Am I willing to give up some amount of ownership and control of my company?
Can I demonstrate that my company is likely to realize significant revenues and earnings in the next three to seven years?
Can I demonstrate that my company will produce a significant return for investors?
Am I willing take the advice from investors and accept board of director decisions I may not always agree with?
Do I have an exit plan for the company that may mean I’m not involved in three to seven years?

When to approach an angel investor

While angel investors are more interested in funding startups and early-stage companies than banks or VCs, the ACA says it’s best to approach an angel when:

Your product is developed or near completion.
You have existing customers or potential customers who will confirm they will buy from you.
You’ve invested your own money and exhausted other alternatives, including friends and family.
You can demonstrate your business is likely to grow rapidly and reach about $50 million in sales in the next three to seven years.
Your business plan is in top shape.

Finding angel investors

Probably the best place to find an angel is an angel group. There are plenty of angel groups, and a good place to start is the ACA’s member directory. Ask other entrepreneurs who’ve been funded for recommendations. Since many angels tend to focus on their industries, your industry trade association may have some suggestions for you as well.

To help you home in on the right angel, you need to know exactly what you’re looking for. In addition to funding, are you seeking mentorship, industry, or general guidance or specific help (finding new sales channels, for example). Jeffrey Sohl, director of the University of New Hampshire’s Center for Venture Research told CNBC, “They’re value-add investors. Don’t just look at [angels] as a source of cash. Look at what’s coming with the money—what kind of advice, what kind of experience.”

Prepare for the pitch

When it’s time to make your pitch, you need to be uber-prepared. That means, even if your business is up and running and has market traction, you need a solid business plan, financial statements, and projections. The angel will want to know what your goals are and how you envision them being helpful to your business. What do you plan to do with the money they’re investing? This is no place for your ego. Though investors want to see you’re confident and capable, they also need to know you’re willing to take their advice and incorporate them into your business.

Sohl told CNBC, “Once you strike a deal with an angel, you are no longer your own boss. So it only makes sense to look for an angel who not only brings valuable insight and connections to the table but also shares your goals for your company.”

Of course, the angel investor will be doing their due diligence on you and your company. But, says Sohl, “Due diligence is a two-way street. As an investor performs due diligence on the entrepreneur, the entrepreneur should also perform due diligence on the angel.” Make sure you talk to the last few entrepreneurs who have done deals with that angel to find out more about how it is to work with them.

Resources

These organizations have a lot of useful information about angels:
Angel Capital Association (ACA)
Angel Resource Institute (ARI)
Gust
New York Angels.

Word of caution

One final thing to remember: Working with angel investors is not for entrepreneurs who are in it or the long haul. The angel makes their money when you’ve so successfully grown your business, it’s sold to another company—and chances are you’ll have to move on.