Biz Features

The Basic Guide to Angel Investors

by . November 18th, 2014

Your business plan is done. You got initial funding from your family and friends, as well as from your own pocket. The business is slowly growing, with working prototypes and you think you’re ready for market entry.

So you got your suit and shoes ready. You reviewed some startup pitch mistakes. You’re finally ready to take on waves of investors and tell them your great idea and solid execution plan. Problem is, how are you going to find an investor?

Time to look to the heavens for angels then.

While not as mythical as those winged beings you thought of, angel investors are individuals who can provide the necessary capital for your business startup in exchange for ownership equity.

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Plus, they’re not as creepy as their weeping counterparts. (Photo credit: alun.vega)

They are usually seasoned entrepreneurs who wants to mentor a younger generation, or to stay abreast with a specific industry.

Angel investors fill the gap between the “seed funding” provided by your friends and family, and the formal funding from venture capitalists.

Angel Investors vs. Venture Capitalists

Although angel investors and venture capitalists have similar activities, there are a l0t of differences between the two. For one, angel investors are affluent individuals with $1,000,000 dollar net worth and a yearly income of at least $200,000. Venture capitalists are usually partnerships, with each member contributing to one venture capital fund.

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Meeting over coffee. (Photo credit: Charleston’s TheDigitel )

The most noticeable difference however, would be the constraints involved when negotiating with them. Because of the nature of the fund, venture capitalists take longer time to decide whether to invest to a business or not because of the huge risk for them. Angel investors can decide over a cup of coffee.

VCs invest a lot of capital of at least $3M. Angel investors finance with less. As mentioned earlier, angels usually fund those with a working prototype for market entry, before the VCs come in.

So where do you get one?

There are a lot of online sites that match angel investors and entrepreneurs. Sites such as AngelList and Gust combine social network and fundraising platform concept to introduce startups to interested angels.

Another source would be angel investor networks. Similar to venture capitalists, investors set up a fund for angel investment and a team screens the potential startups where they could invest their money on. Angel Capital Association created a nifty list of angel investor networks sorted by location.

Most of these would usually go for startups locally so do try to reach out the groups near you.

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Know your pitch inside and out. (Photo credit: thinkpanama)

Some other things you must know

1. Angel investors would research you thoroughly. And by thoroughly, I meant thoroughly. You are asking for financial backing and a high level of commitment after all.

Though they may have better understanding that your startup is in the prototype, experimental stage and thus give greater allowance for failure, they would still determine if you are worth it by asking your background, skills, as well as the business status. Be prepared to answer them in an effective manner.

2. You can and should research your angel investors too! Since angel investors are usually veterans in the industry, they could help not only through financial investment but through mentorship as well. Thus, things like their industry background and experience should be related to yours.

Since 9 out of 10 startups fail, you should research the ventures they invested  on and the level of commitment they gave to help the failed ones.

3. You would get rejected. A lot. Due to these investors’ ability to decide on their own with their funds, you would probably meet a lot of them. And with that comes a lot of rejections. However, you could have a greater chance of getting an investor if you have solid financial projections and you know your business inside and out.

If you get rejected, don’t lose heart! You could always ask for references to other investors in their network that might be interested in your case.

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Do you have more questions about the basics of angel investors? Post your questions in our comment box below.

ABOUT THE AUTHOR:

Kevin is a reader first, a writer second, and a gamer somewhere in between. When not rooting for Tyrion Lannister for the Iron Throne, he's probably writing some morbid short story. He enjoys some surreal art, clever advertising campaigns, and a warm cup of coffee while reading Murakami.

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