In the mythology of startup culture, no figure looms as large because the angel investor. These fickle, godlike beings may become so enamored from your entrepreneurial genius that they fall from heaven and provide you vast sums of money to help manifest your dreams.
But could they be mostly just hype? How can you obtain attention if you want to work with them? What kinds of companies are they a good fit for?
Below, we’ll pull these mysterious figures out from the clouds and see what they’re made from.
What Is definitely an Angel Investor?
An angel investor, or sometimes just “angel” within the investment world, is an individual that reinvests a few of their wealth into startups that are very at the start of their development process.
Prior to 2012, these were specifically accredited investors earning more than $200K annually or who owned over $1 million in assets. Now, thanks to the JOBS Act, the word also includes less wealthy individuals who, with or without accreditation, purchase a company through crowdfunding platforms.
These investors may act independently or as part of a network of private investors. In 2022, angel investors taken into account around $228 million in startup investments.
How Angel Investing Works
The classic catch-22 for startups is that they don’t have money to start operations, however they can’t acquire loans because they aren’t yet generating any revenue. You can hardly blame banks along with other lenders because of not wanting to take that gamble. The failure rate for startups is incredibly high, approximately 75% and 90%, for the way you define them. They just don’t fall under traditional risk models.
Angel investors aren’t offering money in exchange for debt. Instead, they’re buying equity inside your business. The proportion of your business they’ll ask for will be different from angel to angel and deal to manage. Typically, the more money they’re offering, the greater the share of your company they’ll want in exchange. You will be quitting a minimum of some control of the company, though frequently under you'd should you received venture capital. For that angel, this is a high-risk, high-reward investment. Statistically, they’re likely to lose their investment, but the rewards which come from investing in a successful startup can be enormous.
Angel investors may fund your company as:
- Individuals: Essentially, the angel invested inside your company, together with all of your family and friends who're trying to help your business get off the ground.
- As A Group: Nowadays, many angels pool their resources into groups that may then collectively review and examine business proposals. This may also include certain kinds of crowdfunding, in which the funders are getting equity and not simply, say, an item or reward.
The Difference Between Angel Investing & Venture Capital
So wait one minute, these are individuals who invest in startups early in their lifecycle? That sounds nearly the same as venture capital. What is the main difference between an angel investor and investment capital? Could they be exactly the same thing?
No, but they swim in lots of of the same pools. For starters, venture capital has a tendency to come from investment capital firms that pool resources from different individuals, funds, banks, along with other entities. Venture capitals have a tendency to focus on specific types of are startups, developing some knowledge of the lifecycle of, for example, mobile software program startups. Many VCs are even more specialized than that, concentrating on specific phases of early business development.
Angel investors, even when they've their fingers in certain venture capital organizations, invest their very own money directly inside a startup. Not only that, however they tend to invest at earlier stages of economic development than vc's. They specialize in purchasing companies that aren’t yet in the stage where they can raise venture capital.
Finally, while both angel investors and vc's will take shares inside your business, private investors have a tendency to not be as hands-on using the day-to-day operations of your business. Where investment capital firms requires a formal role inside your business (like a seat in your board), private investors often undertake much more of an advisory role.
Is Angel Investing Right For You?
There are a few factors to bear in mind when you’re evaluating whether or not angel investing is a good method to fund your startup.
Do You Want To Quit Equity?
Equity financing may seem like a godsend when you aren’t generating any revenue. It’s similar to free money.
Don’t let the “almost” fool you. You're selling a portion associated with a future revenue you generate, and when your venture works, it might be worth far, way over the debt you would have paid for financing. Not just that, but the angel investor will likely wish to have some input into how your clients are being managed. This isn’t always a bad thing, as many angels are experienced entrepreneurs themselves and could have the ability to offer valuable advice. However, they've already another vision than you do, and you'll wind up having to manage their expectations in addition to your company.
Do You Want To Make the Time for you to Locate an Angel?
It’s no coincidence that they’re named after a mythical entity — angels don’t grow on trees. Be prepared to make a large amount of cold calls, attend lots of unproductive meetings, and shake lots of hands. Angels tend to want to purchase industries by which they have some expertise, so you don't only have to connect with an angel investor, are looking for one who invests in your type of business.
How good are you currently at schmoozing?
Is Your company Plan A great Fit For Angel Investing?
Angels are looking for a large return on a high-risk investment. They’re ready to wait a couple of years to determine it, and they’re even prepared to risk losing their investment.
What they’re most likely not likely to do is invest profit a company with a slow, conservative growth plan which will shell out comfortable but modest wages for that management team. They’re searching for intriguing ip and gigantic markets for your product.
They’re looking for exit plans, so make sure you have some enticing ones.
Are You Situated in A residential area With A Thriving Angel Investor Scene?
With the arrival of crowdfunding platforms and other alike networks, it isn't really as big an offer as it was previously. However, whenever you’re referring to any kind of hotshot investor, it immediately conjures a handful of big cities known for generating startups. There’s simply more local investing infrastructure in places for example Nyc, Los Angeles, San Francisco, and Austin than there are in many other cities in addition to much more of a “risk-taking” culture.
That doesn’t mean you can’t find it elsewhere, only that you may have to be more creative about how you decide to go about seeking angel investment.
Can You Cope with The Consequences Of Failure?
You can breathe easy; I’m not talking about broken kneecaps and Molotov cocktails. Angel investment is, by and large, very safe. Just keep in mind that private investors form networks and speak with one another at great length about the businesses they’ve funded. If you develop a reputation like a poor investment, it’s likely to get around making it more difficult to secure angel investment in the near future.
If Angel Investing Is The Right Fit: Next Steps
If you believe angel investment is right for you which your startup idea fits the profile of the company that angel investors would be thinking about, you’ll be wondering what’s next.
1) Highlight Your Leadership Skills
Angel investors are likely to would rather make use of a known quantity and someone who has experience successfully bringing a product to market. Should you look like you know what you’re doing, you’ll have an easier time raising capital.
2) Edit Your Business Plan/Proposal
Make sure you’re emphasizing elements which will catch an angel investor’s eye. Highlight the size of the marketplace you plan on reaching, the value of your IP, as well as your exit strategies, including possible acquirers.
3) Find Some Angels
Now you have to find some investors. If you aren’t lucky enough to get be networked in with the angel investment scene, you’ll want to hit up some online networks. These include groups for example AngelList, Gust, and much more generalized platforms (e.g., LinkedIn). Be sure to also seek advice from groups in your local company scene; who knows who could possibly make an introduction for you personally.
Learn About Other Types Of Financing For Startups & Entrepreneurs
While many startups would love to work with an angel investor, keep in mind that there are other methods to finance your business whenever they prove elusive. We’ve already talked a little bit about venture capital, that is another type of equity financing widely used by startups. If you’ve never heard of venture debt, it’s worth keeping in mind if you need to fund capital or equipment expenses on the way. You may also want to consider crowdfunding inside a more general context.
Finally, should you don’t think your business model is a great fit for equity financing, you may want to consider using a personal loan for business expenses.
