What Is an Angel Investor and How Can They Help Launch Your Startup?
Tips for securing angels while keeping in mind what they expect from you.
If you’re already an affluent entrepreneur, you can finance your startup business from your own pocket. But not all entrepreneurs enjoy these financial circumstances. Another option you can use is IPOs, but still, you need to face lots of legal obligations and fees. The same is the case with bonds and bank loans.
But don’t worry, there’s a sweet spot: angel investors.
According to the European Trade Association for Business Angels, from 2016 to 2017 angel market grew by 9%, that is €7.3B, and angel investments in the USA increased to $23.9B. The angel's community in Europe has around 337,500 investors who closed 39,990 deals in 2017.
So, what is an angel investor? How you attract angel investors for your fledgling startup? You’re going to learn all the stuff in this article.
Let’s dive right in.
What is an angel investor?
Angel investors are high net worth individuals or groups of individuals who have extensive knowledge and experience about markets and industries for investment.
They are high-risk takers; that’s why they invest in startups and other business opportunities to help entrepreneurs make their venture successful. They also sometimes share their experience and knowledge, which is a bonus benefit.
In the USA, they’re called accredited investors. The investors who need the least financial protection and are sophisticated financially. Commonly they include high net worth individuals, brokers, trusts, insurance companies, and banking institutions.
In a startup business, banks and other financial institutions hesitant to invest because of the risk of loss. At that time, angel investors are the only source for funding these startups to help entrepreneurs grow them quickly.
What are the pros and cons of angel investors?
Getting angles for your startup business is an excellent option, but you need to consider some pros and cons to take an optimal decision.
Advantages
- Risk takers
Angels are risk-takers; that’s why they can help you while you’re beginning your business if your ideas and feasibility appeal to them. In the beginning, banks don’t give loans because they need security for their money, but at this point, angel investors take risks.
2. Share expertise
Some angels give you money and share their expertise and knowledge to make your business successful. Because they are very professional individuals with years of experience, it increases your chances of success with the startup.
3. Have network
Angels usually have a network with others and know many other angel investors. They have communities that help startups to generate funds. So you can take their help to find more angel investors as you face more and more financial needs. Nowadays, they have local communities for crowdfunding as well as online groups on Facebook.
4. No debt
If you take a loan from a bank, you need to pay interest and principal amount irrespective of whether your startup gets successful. But in the case of angel investors, you don’t need to take all this tension. When an angel invests in your business, he becomes a shareholder. In both cases, profits or losses, he will get a share. You don’t get all the liability on your shoulders.
Disadvantages
- Demand higher return
Usually, angels want a higher return because of the higher risk they face. If an angel invests in 10 different startups, 3 to 4 get failed and only get big in 2 to 3. Due to this high risk-taking, they demand a higher return. Allan Riding an angel investment expert says that for each dollar, an angel invests in a specific company he/she wants seven dollars after deducting taxes in seven-years.
2. Take profits cut
Mostly angels want equity ownership in any business they invest in. Sometimes they agree to convertible debt or loan, but mostly they prefer equity. They get gains in their investment as the venture becomes successful and require you to give them a portion of profits according to their investment percentage. This lowers the profit margin for you.
3. Lacking control
Experienced and well-versed angel investors require you to permit them to take part in management. They want to share their expertise and knowledge, but the downside is that you can’t run all the operations according to your choice. You get limited control over the business. Whenever and whatever stance you take to make the company go one step ahead, you need to give your angels reason. It may result in a conflict between you and the angels.
4. Hard to find
Angels are great options to finance your startup, but at the same time, they are challenging to find. Usually, international angels don’t like to invest out of state. They want to invest where they can quickly meet you and discuss the business plans and operations. On the other hand, if you go local some times what business you ‘are doing didn’t match their expertise and industry, and they don’t invest in your business.
How to attract angel investors?
For attracting angel investors, there are some cool strategies that you can use to get them to invest in your business. Here is the quick list.
Prepare the basics
The first and most important is to get the basic things done correctly. Have a competent and fantastic idea and a business plan that is concrete and compelling.
Mention how you market your business, your targeted customers, and the realistic future predictions. Also, include the successful feasibility test report to help your angel understand that your idea has power. If you get your hands strong on these factors, you can easily convince your angel.
Try to get local angels
Angels exist everywhere, local, national, and international. But the problem is mostly international angels don’t invest to avoid the risk of fraud. They want to invest where they can regularly discuss business operations and plans. In short, it means they have a hold on the business.
So try to pitch local angels where your business is located. Get into local communities and groups that have related investors with expertise in your industry.
Allow him to get involved
In most cases, angel investors want to take part in the management along with giving you money. They want to keep an eye on business affairs and like to share their knowledge and expertise to help startups grow in the future.
It is a good strategy for obtaining investment, and you should take care of this thing. On denying these requirements, chances are they don’t invest.
Offer equity ownership
As I early mentioned, angels want equity ownership in the business. There are several reasons for it: controlling the business, earning a greater return, and increasing their wealth.
Equity ownership is also favorable to you from a loss point of view because the angel will share it. You can give them equity ownership either in common stocks or preferred stocks or whatever other options are available.
Provide information in detail
Don’t hesitate to give in-depth details about you and your business to make them more confident to take an investment decision. Tell them about your experience and expertise in the industry of your venture. Present realistic calculations and estimations of risk, return, and future growth.
Share your previous achievement in business. This helps them realize that you’re not a mediocre person who knows nothing but a professional business owner.
Provide the exit door
Around 50% of the businesses angels invest goes out of business, and only 20% scale to a large company. Therefore they are careful about an exit strategy if the business goes against their expectations.
You should mention that point in your agreement. There are lots of exit strategies, like selling out their ownership, IPOs, and mergers. Exit strategy lowers risk for them.
Professional management team
With your expertise and experience, your management team also needs to be well versed in managing a business. Angels become more convinced to invest in a business where the entrepreneur has a good and experienced board of directors, finance team, and marketing and sales teams to manage different business affairs. Finally, you know all of the business success depends on how well it is managed.
Offer reasonable margin
I mentioned earlier that angels try to get a higher return for their investment because they take the risk; that’s why they want seven times to return on their investment. And that is the standard rule in finance that higher risk higher return.
You need to offer them a higher return than all the other opportunities available in the market. For example, stocks, mutual funds, CDs, ETFs, and bonds, etc.
Networking with angels
The final strategy is to have a network with angel groups and communities. Nowadays, the online world makes it so easy for you to find angels. There are many Facebook, Reddit, and Twitter communities devoted to angels where they are regularly present. You can join them and build relationships with them and have discussions to take help. You can also find angels on online lists like Angel list and Dust website.
Final words
Considering all the pros and cons, you should go for angel investors if your startup needs investment. To some extent, it isn’t easy to find and convince suitable angels, but the effort worth doing.
If you adequately executed the above strategies, you can easily convince angels to invest in your startup. Just try to act like a professional business owner who knows how business works and has experience in the industry because angel investors are usually people with years of experience related to investment and running businesses.
