What is an angel investor?

Angel investors typically have personal wealth and want to use that to financially back small startups. Oftentimes, their monetary support comes in exchange for equity in the business – you may have seen negotiations to this effect on Dragon’s Den. Depending on the level of investment needed, angel investors don’t need to be as prestigious as the Dragons – it could simply be family and friends who believe in your product or service and want to help you achieve your business goals.

Angel investors might be preferable to other types of investors or loans due to the favourable terms – often there’s no expectation that the funds be paid back. Meaning not only is the principal amount yours, but also there’s no interest accruing while you try to earn enough to pay it off. Even if you wanted to explore other funding routes, many won’t take a risk on a business that is just taking their first steps, so it’s possible that finding an angel investor may be your only real option at getting a big cash injection at the start of your business journey.

How do angel investments work?

Depending on your arrangement, angel funding could be a one-off investment or it could be ongoing financial support throughout various stages of business development. As angel investors are usually individuals and not big investment firms, they tend to have smaller investment amounts that don’t represent more than 10% of their portfolio. Many times, this can range between £25,000 to £125,000.

A 2021 study in the United States by the American Capital Association showed that 70% of angel investor deals were for less than $200,000 (approx. £150,000). For many businesses, that may be enough to get them through at least the first year, however, for others that may need to start fundraising again soon after snagging their first angel.

As perfect as an angel investor may sound, you should go into these agreements with your eyes wide open. As a major investor, they will want something in return even if they don’t ask for the money to be repaid. This could be a stake in the company, a seat on the board, regular updates and input on your progress, or a say in decision making. Be sure that you fully understand an investor’s expectations and how they could affect your future earnings.

Research what anti-dilution clauses and preferential shares are and understand what their implications are for your ownership. If you’re not familiar with various terms, you could be taken by surprise when it comes time to share the profits around. When in doubt, consult a professional before signing any paperwork with a potential investor.

Why seek investment?

Giving up some control can be daunting – you care about your business and know it better than anyone else. However, there can be good reason to let people in. Nearly 90% of startups fail, with the first year being particularly fraught due to issues securing funding. In 2015, a report by the British Business Bank showed that just 1% of small businesses had taken on funding in exchange for equity in the business. While that data is quite old now, it is still a very valid concern for small business owners to have.

If your business needs funding, it is worth weighing up the benefits and drawbacks of using an angel investor.

Benefits:

  • Less risk than other financing options: If the idea falls through, typically you’re not requited to pay the money back.

  • Added credibility: If the angel investor is a prominent person in your field, having their backing may provide more legitimacy to your business idea.

  • Networking: A good investor will likely connect you with their associates whether they be suppliers, customers, employees, accountants, lawyers or other relevant people.

  • Support: They may be expertise in your specific area of business or just at managing a business in general and be able to advise when you inevitably reach some hurdle for your business.

  • Odds of success increase: According to The Telegraph, the average startup needs nearly £25,000 to make it through their first year. So, every bit of extra funding helps your odds of success.

Disadvantages:

  • Too many cooks in the kitchen: Bringing new people on board means that you’ll no longer have unilateral decision-making capabilities and will have to run ideas past your other major stakeholders. While this can be helpful to have other perspectives, it can also be difficult to balance everyone’s different ideas on how to move the business forward, especially when those ideas are at odds with your own.

  • Can take a long time to find: Finding the right investor can take a good chunk of time. As someone who is already doing all the hard work of starting the business, it may be hard to find the time to search for investors and get your pitch deck ready.

  • External expectations: An angel investor is hoping to see a return on their investment and may push you to make decisions faster than you were planning to. They may add some extra pressure to accomplish things.

  • Dividing future earnings: If the investor is taking a stake in the company then they’ll get a portion of future profits. Every new investor that takes a stake divides this number further.

The investor process

If you do decide that looking for an angel investor is the right move for your business, it may be helpful to have an idea of what that process looks like. While each investor might have their own way of doing things, this will give you a general idea of how investors choose their investments:

Indentify opportunities

An investor may have a certain area that they specialise in such as technology, health/medical, telecoms, and more. If they’re looking for a company to invest in, they’ll likely network in these industries to start connecting with possible investments. They’ll likely ask a lot of questions to screen business owners and assess who fits their investment profile and who does not.

Invitation to pitch

Startups that pass the initial screening may be asked to give a full, detailed pitch for the investor to properly evaluate their business plan. This might include going over competitor analyses, market analyses, target customer analyses and more.

Negotiation

If an angel investor is interested in supporting your business after they’ve heard the nitty gritty details during your pitch, then it’s time to work out the details. You’ll iron out all the specific terms of agreements and come to an understanding about what each side’s expectations are.

Filling

If your business needs more money than one angel investor can provide, then the angel may help you fill in the remaining funding gap. They may connect you with more people in their network or act as a spokesperson to help you get the extra money needed. This helps the angel investor protect their investment by giving you the right tools to succeed.

Closing

Once there’s enough money for an investor to be sure that you can move forward and they’re not just wasting an investment, they’ll begin the closing process with you. This is all the legal stuff and binding agreements that formalize your terms.

Finding an angel investor

Finding not just any investor, but the right investor for your business needs can be a complicated process and may require a few different avenues to make it happen. Here’s a few ideas to get you started:

  • Try a website dedicated to connecting businesses with investors. While this sounds niche, there’s actually quite a few that can help such as Crunchbase, AngelList, Angel Investment Network or the Funders Club to name a few.

  • Attend industry events. You know that at these events there will be people who are passionate about your field in attendance. It’s an easy way to get around like-minded people who may be able to point you in the right direction for funding.

  • Network. This is age-old advice, but it’s stuck around because it is still useful as ever. Ask for connections and get yourself in front of the right people whenever possible.

  • Talk about your idea to anyone and everyone. Take speaking engagements when you can and present yourself as an expert in your field. You never know when the right person will be in the audience.

Once you find some prospective investors, it’s important that you screen them in the same way that they screen you. Here’s a few things you may want to consider when evaluating a potential investor:

  • Where are they based? If they’re located close to your business, there’s a better chance of them getting involved or of you being able to meet with them easily when you want some guidance.

  • Are they familiar with your industry? While this may not be a deal breaker, it can be helpful if they have extra experience in your particular field that they can bring to the table.

  • What else do they bring to the table? If they don’t have experience in your specific industry, they may have other skills of use to you. Whether that’s business sense, a legal background, or can fill another gap in your skillset.

  • What’s their track record? If they’ve invested before, it is worth looking into how those businesses did and how the investor was involved in that investment.

  • What’s their network like? If they can help you make other relevant connections such as suppliers, funders, bankers, lawyers, and business advisors, then they may be a great person to have on your team.

What are investors looking for?

Now that we’ve covered the investor process and what you should be looking for, let’s take a look at this from the other perspective. The Angel Investment Network’s (AIN) 2022 Global State of Angel Investment Analysis showed that while there was a 6% increase in the number of angels searching for a startup, there was a 7.5% drop in pitches. This means that right now, there’s a surplus of angels available to invest.

According to that same report, the top sectors that angels are hoping to invest in are:

Technology

Software

Food and Beverage

Finance – especially FinTech

When they go to screen your business, they’ll likely look for:

Realistic financial thinking and projections

Potential share values and return on investment

You and your business’ online presence – is it professional or a red flag representation?

Green priorities – AIN has noted an increase in investors looking for businesses that have a focus on sustainability.

Preparing for an angel investor pitch meeting

If you’re looking for funding, you should definitely brush up on your public speaking skills as that will be an important asset to you. You’ll want to practice this pitch as much as possible so that you know it inside and out and can be sure that you’ll keep it concise – about 20 minutes is the maximum you’ll want it to run. When thinking about what goes into a pitch you may want to include the following:

  • Show a demonstrated demand or need in your target market

  • Have a specific long-term vision for the company. Consider splitting it into several phases

  • Create projections that show how much money you’ll need for each stage as well as projected ROI

  • Create detailed consumer studies with relevant psychographic details

  • Have a marketing plan with some ideas on how to get your business name in front of the right people

  • Have a plan for future growth and immediate next steps

  • Demonstrate strong industry knowledge and experience

  • Conduct competitor research

  • Be prepared to answer questions on the spot at the end

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To help keep your presentation engaging you’ll likely want some sort of visual aid to go along with all of your details whether that’s a powerpoint, a poster board or something else. With these, try and keep them quite simple as well. Don’t overload on information, just highlight the absolute most important points for your potential investor. For more advice, read our guide on pitching for investment like a pro.

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