How Does Angel Funding Work: Startup Guide Series


How does angel funding work? That’s the big question we are seeking the most appropriate answer today! But before that, will you let money stop you from pursuing your dream? Certainly NO! When you have a great startup idea, funding is nearly always the sticking point. You have a great idea, you may have a great team in place, but to actualize your idea, you must execute it, but executing any idea requires a solid funding base. What a puzzle!

One of the great ways to complete this puzzle is getting funding from an angel investor. Angel funding comes from wealthy individuals who invest in small companies, and hope that one of them becomes the next Uber, Facebook, Lyft, Google, etc.


There are many great ways to fund a startup. In this guide, we shall be looking to answer the question of how does angel funding work, and how to fund a startup using an angel. But who is an angel investor? Where are they found? What do they look for in a startup? How do they fund a startup?


For these and many other questions, let’s get ourselves rolling.

How does angel funding work?

An angel investor, also known as a seed investor, private investor or angel funder, is a high net worth individual, who provides finances and another backing for small startups or entrepreneurs. This happens typically in exchange for ownership or equity in the company to be funded.

The fund that an angel investor provides may be a one-time investment, to help businesses get off the ground. They normally inject cash to support and carry a company through its difficult early days.

Typically, angel investors are known to invest anywhere between $25,000 to $500,000 to help a company get started. In most cases, angel investors are the last option for startups that don’t qualify for bank financing or may be too small to ask for funding from venture capital firms.

What do Angel Investors Look for?

Angel investors typically reject three-quarters of funding proposals they receive from startups. This normally happens because there are key aspects and details they look for to fund a startup. Key of the things they look for in a startup include;

1.      Management Team

management team
Image by Free-Photos

Angel investing includes a high degree of risk. These investors are more likely to invest in people rather than just ideas. They want to work with people who can be vetted. They want to know if the founder is tested in the current company.

Does the management team have a strong CV with relevant experience? Is the founder coachable? They want to know is the founder and his team have experience starting, growing and exiting companies.

2.      Product or Service entering the Market

What type of product or service is entering the market? Does your product or service have a distinct and tested value proposition with a good customer base? Does the product or service to be offered have some market traction – it should obviously be more than just an idea.

3.      Competitive landscape

Angel investors will go a great length to evaluate how competitive the industry you intend to venture into is. They will look at the barriers to entry. They would want to know if there are any enforceable intellectual property.

How long would it take for a competitor to copy the product or service you offer? If your product is already in the market, how many viable competitors exist?

4.      Market attractiveness

Angel investors would want to evaluate the market attractiveness of your product or service. They want to know if the addressable market has several billion dollars or not. Does your company have the potential to make $10 million in annual sales?

5.      Financials

The last thing angel investors would want to know is how long the company would take to have a positive cash flow. What would be the magnitude and stability of cash flows? They would also want to know if the company they are to invest in has a valuation that is attractive and justifiable.

Difference Between Angel Investors and Venture Capitalist

When you are looking to fund your startup, two of the major options that exist are angel investors and venture capitalists. Angel investors and venture capitalists have a number of similarities and so are the differences.

Nature of Funding

Angle investment is usually the earliest investment that a startup secures from wealthy investors. In most cases, angel investors are former employees of startup companies who enjoy taking the risk in early ventures.

On the other hand, venture capital investments are early investments that are usually made in growth companies by organizations that have a pool of funds from corporations, individuals, foundations and pension funds.

Representation

Apart from funding, a venture capital firm takes an active part by representing part of the board of directors of the investment firm. They help in recruiting senior management to help in strategic decisions.

They take a calculated risk by maximizing the revenue growth capabilities of a startup. Additionally, they perform due diligence to ascertain if a venture is worth their investment. On the other hand, angel investors invest in the pre-revenue business and are easier to find.

Investment size

For angel investors, investment is limited to a few million. For venture capitalists, they invest big. This is attributed to a larger financial war chest they have, from contributions of pooled funds.

Investment time

The time for investment decisions and sales pitch slightly differs between the two. For angel investors, investment takes a shorter time for decision making, since it involves an individual investor.

For venture capitalists, it takes a longer time to make an investment decision. This is because they have to make consultations from different stakeholders who have different interests. It is tougher to convince a venture capital firm for investment decisions.

Things You Must Know about Angel Investors

By far, angel investing is one of the most important sources for investment in startups. These investors take an active part in business decision making and can help you secure a series of upcoming funds you may need for your venture.

Before you can commit to an angel investor, there are a couple of things you must know. Things you need to know mostly revolve around their personality, history and business handlings. They include the following;

Trustworthiness

You need to find a trustworthy angel investor. You don’t want someone who will create problems for you and your company at a later stage. You need to find someone who is trustable as well.  A good angel is someone who will invest in you and your team, and not just your company.

Good decision-making skills

You need to find someone who will not have to wait for too long to evaluate your proposals and make decisions. Good angel investors have an eye for talent, and if they see a potential entrepreneur, they will make a swift decision to invest.

High Integrity

Integrity is key to doing clean business. A good angel is collegial. He looks forward to working in a collaborative and cooperative environment along with other members of your team. You need to look for a winning attitude in your investor, and how much positive impact they can contribute to you and your team.

Involved in your venture

A good angel should be fully involved in your venture. They always try to do everything possible to facilitate a smooth sailing for your startup to become profitable and successful. They will help you to make key decisions pertaining to your financials, hiring decisions and business sustainability.

Investment History

You should perform an analysis of past investments your potential angel investor has been involved in. Evaluate how things unfolded and which key decisions did they make contributions to the success or failure of a past startup. Good angel investors are great mentors.

Advantages of Angel Investors

Before approaching an angel investor, you should consider whether other forms of financing could meet the needs of your venture. Raising capital from angels has a number of advantages, which include the following;

Provide the funds you need

The first and foremost importance of angel investors is that they provide funding that entrepreneurs dearly need for their funding activities. Funding a startup at an initial stage that may lack traction is very important. They show a lot of faith and trust to founders, leading to investing.

No Collateral

Many businesses have failed to secure funding from other sources due to collateral and money guarantees such sources need before they can lend their monies. Well, with angels, things are different. They finance startups even if they don’t have collateral. What they ask in exchange is a piece of equity in the company.

Flexible Business Arrangements

business
Image by Werner Heiber

Angels normally offer a flexible business arrangement when compared to banks and venture capital firms. Their business deals are normally negotiable because they make investment decisions touching on their money.

Knowledge, Expertise, and Mentorship

Angels are seasoned entrepreneurs who have a lot of business experience. They have funded and grown multiple businesses that became successful. They will provide you with capital, mentorship, and connections you need to open you to the world of business.

Disadvantages of Angel Investors

It would not be a complete guide to talk about all the pros of angel investors without mentioning some of the cons.

Rare additional investments

Angels rarely provide additional investments when necessary. This is because of the risk of losing more money. They are normally unwilling to invest additional monetary resources because they are afraid a venture would come down crumbling.

Could be Costly

Some angel investing could be costly. This happens especially if the angel investor is greedy and they ask for a large portion of your company’s equity. It may be reasonable because they are investing in a venture that is untested, by some may have many greedy motives.

Where to Look for Angel Investors

Before you can find an angel investor, ensure that your company fits their profile. You need to do all the initial work required to get your business ready. Angels will invest in companies that not only have great ideas but also are constituted by great teams.

There are four main places or sources you can find angels. These places include;

Friends and Family

A good starting place is from your friends and family. You need to evaluate if there are high net worth people in your network who are already investing in startups. You will get a warmer reception if you find you have some friends and family members who have the potential to become angel investors.

Angel Groups and Networks

There are angel networks and groups that are always on the hunt for startup ideas to fund. These networks are receiving emails, proposals, and pitches from every corner. You need to do your homework to find these connections. Never hesitate to approach an angel group or network with a ready proposal and pitch.

Angel Investor Events

Angel investor events and dinners are happening frequently all over the country. These events present a great opportunity to get your startup going. Investors will be actively looking for attendees to invest. You need to do a quick search to see if there are any of these events happening in your town.

Online Platforms

There has been a mini-explosion of online platforms that are specifically created for the purpose of angel funding. These platforms have a list of accredited angel investors, their financial history, their investment history, educational background, location, and contacts. You only need to pay attention to what they need and contact them.

Pitching to Angel Investors

You have found what seems to look like a great idea, you have done your market research, you have assembled your team, you have built a minimum viable product, you have some customers, and have spotted some potential angel investors. So what’s next?

The next step in the process is to pitch to potential angels. Here are some aspects to get right.

The elevator pitch

Remember who your audience is and the core purpose of the meeting. The first thing you’re going to send to an investor is your elevator pitch. An elevator pitch is not a sales pitch. It is a short well-crafted explanation of the problem you intend to solve, how you are going to solve it and how big the market is for your venture.

The pitch profile

Most proposals and emails that are sent to angel investors find themselves in the spam folder. When you send your elevator pitch, avoid falling a victim of spam delivery. Instead, send a link to your pitch profile, which is normally an online profile that explains the contents of your deal.

The Executive Summary

In case the angel shows interest in your pitch, they may ask you to send them an executive summary. The executive summary is a two or three-page synopsis of your business plan. It covers key issues such as problem, your solution, market size, management teams, competition, and financials.

You need to make angel investor’s work of making a decision to be quicker. Don’t send them piles of pages and expect they have all the time in the world to read your proposal.

Pitch Deck

There is a likelihood that an angel investor will ask for the pitch deck. A pitch deck is essentially your business plan in an executive way, that is presented in about 10-20 slides, in a PowerPoint format.

Investors like asking for pitch decks because they force an entrepreneur to be brief and to the point. A pitch deck will be your best friend when it comes to the actual meeting with your investor.

Pitch Meeting

Once the angel investor has reviewed your materials, and they are convinced you to have something outstanding worth their time, they will ask for a physical meeting for you to present your ideas. During the meeting, you will discuss the pitch deck and answer all questions coming from the process. Be brief and to the point, and don’t waste investors’ time.

Angel investors typically reject more proposals than they can accept. That’s obvious based on the fact that many potential investors approach them when it’s too early, have not performed due diligence, their idea has not been converted into a product or service that has some traction or they overvalue their venture.

To secure funding from an angel, your venture needs to have the potential for a solid return. You must give your angel a good reason to invest. You must have an experienced and solid management team in place. Have a solid business plan and a practical business model. Above all, give your angel investor an opportunity to be actively involved and have a viable exit strategy.



Alberto Venditti

Alberto has more than a decade of concept & production expertise in engaging with clients and end-users for both the entertainment and the advertising industry, marrying his passion for strategy with years of field research in user experience and a solid academic background in Psychology.

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How Does Angel Funding Work: Startup Guide Series