Attracting capital from angel investors is one of the most common ways of raising funds for a startup. In this article, we’ll give a definition of an angel investor, explain what they do, and share tips on convincing them to fund your business.
Who is an angel investor?
These people are also known as:
- Angel funders
- Business angels
- Seed investors
- Private investors
- Informal investors
They act as private individuals and support promising startups in exchange for equity or convertible debt. They have accumulated considerable wealth and expertise. Such investors are ready to take high risks to get a chance to earn much more. Equity in a startup that takes off and scales might give them a much higher return than traditional investment opportunities.
Normally, angel investors transfer money to the founding team only once. The sum is usually not too high and rarely exceeds $100,000. Investors of this type are usually eager to support early-stage innovative startups with disruptive ideas that are likely to revolutionize their respective market niches. They prefer startups with defined exit strategies and good opportunities for IPOs or acquisitions.
Difference between angel investors and venture capitalists
Compared to other sources of funding, angel investors tend to be more flexible. They can believe in a great idea while banks are only interested in the client’s opportunity to return the borrowed funds. Angels are focused on the talent, energy, skills, and vision of founders.
Venture capitalists, when making funding decisions, assess the measurable potential of a business and not the personalities of its founding team. While angels invest their own money, VCs take cash from pools to which multiple companies and individuals contribute. They bear responsibility for the profit of all members.
Around one-half of all startups hope to get funding from venture capitalists. Less than 20% expect to get support from angel investors.
How to identify an optimal angel investor for your startup
When assessing your match potential with an angel investor, focus on these four factors:
- Industry experience. If an angel investor has expertise in your niche, they will be more enthusiastic to support you. Apart from finance, they will share knowledge and industry contacts with you.
- Mentorship ability. Ask the investor whether they would like to mentor you. Some might be unwilling to do so. Others might lack mentorship skills and are only ready to share money.
- Investing experience. Experienced angels provide better mentorship.
- Financial stability. Imagine that an investor writes a check to you — and in six months, they say their business is performing poorly and they need their money back. A good angel has enough cash for all the ventures they support and will never put financial stress on your startup.
The lack or presence of accreditation is a secondary parameter. Not all accredited investors are angels or vice versa.
How to establish a relationship with an angel investor
Once you’ve detected an angel investor who seems to be able to support your startup, stick to this sequence of actions:
- Get references. Find out about the previous investments that your angel of choice made. How many startups did they fund? How many of these businesses failed and why? What do people from your industry think about this investor? Research publicly available information and leverage your contacts to get to know your angel.
- Align goals with your investor. Discuss how much money you need, what the investment time frame will be, which part of your startup the investor will control, and how they will influence your decision-making process.
- Select a format for your future interactions. Does your investor prefer to be a mentor or a silent partner who only provides you with money? If they’re ready to mentor you, how often will your meetings take place, how should you prepare for them, and which communication channels will you stick to?
Treat all your conversations with your angel investor as a job interview. Prepare for each interaction and do a lot of research. Take notes during calls.
Criteria that angel investors rely on when selecting startups to support
When analyzing the businesses that have applied for funding, angel investors scrutinize their teams, operations, achievements, and niches. Here are the key aspects that they pay attention to.
Personal contacts and recommendations
Angel investors are more supportive of startups whose founders they know personally. Alternatively, a trusted colleague can refer these founders to them. That’s why many investors only deal with businesses from their area.
Professionalism of pitching
Before arranging a meeting with founders, an angel investor expects to receive a 15–20 page pitch deck. It should be informative, compelling, and well-structured. On the Internet, you can find examples of top-notch pitch decks and create yours based on these templates.
Rapport and coordination within the founding team
An angel investor will ask themself these questions:
- Who are the members of the founding team?
- Have they collaborated on any projects before?
- Which spheres do they have expertise in?
- Which skills do they lack and who would they hire to compensate for that?
- Is it easy to substitute founders with other industry professionals?
- How many employees does this startup need?
- What’s the primary motivation of the founding team?
- What are their plans for scaling in the next 12 months?
- Is the CEO trustworthy and ready to listen to other people’s opinions?
The investor will support a startup if they believe in its team and think that they will enjoy working together.
When an investor supports a business, they expect it to scale and generate a substantial income. If your initial idea is too small, consider positioning your company as a platform business that will facilitate the creation of multiple products. It’s vital that your business plan includes the market share that you aim to occupy over time.
To convince the angel investor that your product is unique and capable of generating a large profit, explain:
- What makes it different from its competitors?
- What are its milestones?
- Which two or three key features can be added to it?
- How frequently are you planning to update it?
It would be great if your product already had customer reviews that you can show to the investor.
In 2020, there were around 1.35 million tech startups in the world. To stand out from the rest, your project needs to involve a differentiated technology that your competitors would fail to replicate. The angel investor will ask you about the following:
- Intellectual property for that technology
- Domain names
You should be able to integrate this technology into each of your products with affordable expenses.
If these statements are true, it means a startup has made early traction.
- It’s ready to show a beta version or minimally viable product.
- It has formed strategic partnerships.
- Customers have provided testimonials about the startup’s products.
- It has generated a lead list or acquired an initial pool of clients.
- Bloggers and mass media have covered its brand and goods.
The more traction you have, the easier it will be for you to raise funds and join incubators or accelerators.
It’s important to draft a detailed marketing plan before you start searching for investors. In this document, you’ll need to cover these points:
- Your target market
- Optimal ways for approaching it
- Projected customer acquisition costs
- Ways of leveraging the power of social media
- Approach to using Google, Bing, and Facebook
- PR methods that you will employ
- SEO techniques and tools
- Your vision of content marketing
If you’re planning to rely on third-party distribution channels, specify the ways of incentivizing them.
It’s impossible to foresee all potential risks — but the investor needs to assess your way of thinking about them. Your business plan should mention your weak points and options for overcoming them. Speak about legal, technology, regulatory, and product liability risks.
Understanding of financials and the key metrics
To get funding, a startup team should convince the investor that they know how to handle these metrics:
- Monthly burn rate of the business
- Projected growth in revenues
- Gross margin
- Lifetime value of a client
- Customer acquisition cost
- Key components of gross revenues and gross expenses
You’ll need to share your vision of how long it will take your business to become profitable. You’ll be required to specify how much funding you’re planning to attract later and when exactly you will try to do so.
Angel investors want to fund businesses that will go public and make $50 million in sales within 3 to 7 years. Your task is to prove that your startup has serious potential and explain why your forecasts are realistic.
Growth in revenue goes hand in hand with growth in operating and marketing costs. Inform the investor about your ways of cutting down expenses and boosting profit.
Terms and valuation of the funding round
An angel investor will be likely to ask you:
- How much have you already raised?
- Which sources of funding have you relied on?
- How many investors will be participating in the upcoming round?
- Who will be leading this round?
- What minimal amount of capital do you expect to raise?
It’s often challenging to determine the reasonable amount of funding for an early-stage startup. That’s why many investors resort to convertible notes and SAFEs. 60% of all seed deals in the US involve convertible notes.
Terms of using the investment capital
Your angel investor will ask you what you’re planning to do with the funds that they give to you. They will be curious about your burn rate in order to estimate how reasonable your plans are. The capital that they provide should be enough for you to reach the next milestone of your business development.
7 websites where founders can find angel investors
To find an investor for your startup, check these platforms:
- Life Science Angels
- Tech Coast Angels
- Golden Seeds LLC
- Hyde Park Angels
- Angel Investment Network.
They are the top seven websites where startups from various sectors can look for angel investors in 2022. Most of these organizations have a large following on Twitter and Facebook and run informative blogs for startupers on their websites.
This website is focused on helping tech startups reach three goals:
- Raise funds
- Recruit team members
- Attract angel investors
Industry talents can look for jobs in startups through AngelList.
Life Science Angels
The target audience of this platform is professionals from four niches:
- Medical devices
Founders can submit funding applications right through the website. There, you’ll find tips on how to compose the application to boost your odds to succeed. Many angel investors on this platform are founders or senior executives of healthcare businesses.
Tech Coast Angels
This one caters to startups from four industries:
- Life sciences
- Information technology
The Tech Coast Angels network includes more than 400 investors who are ready to share knowledge and contacts with startup teams.
Golden Seeds LLC
This early-stage investment firm only provides cash to businesses that were founded by or are currently run by women. It is focused on:
- Life sciences
- Consumer products
To apply for funding, you’ll need to pay a $50 fee and deliver multiple pitch presentations.
Hyde Park Angels
This network includes over 130 investors who are eager to support early-stage startups primarily from four niches:
- Industrial technology
- Information technology
- Healthcare services
- Financial services
If your business doesn’t belong to any of these industries, you can try to apply nevertheless.
FundersClub evaluates all the applications that it receives and admits only 2%. If you’re rejected, you’ll at least get valuable experience. Even though you can submit an application online, it would be great if the representatives of one of the Club’s portfolio companies could give references about you. If you qualify for support, you’ll get not only funds but also access to an extensive network, community, and resources.
Angel Investment Network
With over 300,000 members, Angel Investment Network is the largest group of angel investors in the world. Startups from any niche can get cash with its help. However, businesses that deal with property, software, and technology have higher odds to raise funds.
Top 10 angel investors in the world
Here are the most famous angel investors on the planet.
Forbes named this French entrepreneur the #1 angel investor in the world. He has funded over 240 businesses from various regions, including Alibaba Group, Airbnb, Beepi, FanDuel, Palantir, and Windeln. He believes that smartphones and mobile technologies will revolutionize the world. Before launching his own startup studio and venture fund FJ Labs, Grinda used to work as a CEO for three multinational companies. He co-founded OLX, one of the largest classified websites in the world.
This American angel investor of Indian origin has provided financial support to over 200 startups — Twitter, FourSquare, and SnapLogic among them. He used to operate as a venture capitalist for a short while. His primary mission is to connect entrepreneurs with companies and individuals who can fund them. Ravikant runs a podcast where he shares business knowledge and his personal experience with his audience. He’s the co-founder, chairman, and former CEO of the above-mentioned AngelList.
O’Neill became rich thanks to co-founding MeziMedia that operated coupon and comparison-shopping websites. He has funded over 160 businesses, including 500 Startups, Facebook, and Linkedin. He’s particularly interested in blockchain, cryptocurrencies, digital currencies, and space travel. O’Neill is the general partner at the VC firm JuvoCapital that contributed to the success of Tesla Motors, LinkedIn, and Facebook.
He’s a dermatologist who studied at the University of Jordan and lives in Saudi Arabia. He has launched two startups and invested in over 150 businesses (such as Notion, Unsplash, and Buffer). AlSogair famously said that instead of supporting “what’s predictable” he prefers to fund “what matters”. While investing actively, he keeps practicing dermatology and specializes in aesthetics.
This is the person who created Gmail and built the original prototype of Google AdSense. Together with three other former Google employees, he launched the FriendFeed social network aggregator that Facebook acquired in 2008.
This American computer engineer and entrepreneur has given cash to over 150 startups. He prefers to support companies that are based in Mountain View and Silicon Valley. He’s predominantly focused on four industries:
- Enterprise software
- Information technology
Besides, he runs Y Combinator Core.
This investor from China has supported around 150 startups — Worklife, YesGraph, TaklIQ, and VetPronto among them. His mission is to help businesses globalize their operations. Forbes included Wei Guo in its 30 Under 30 list. He launched two organizations that provide cash to startups: Wei Fund and UpHonest Capital. They attract money not only from Chinese investors but from abroad as well.
Cuban believes that startup founders need to be passionate about what they do and know their niche better than their competitors — that’s the formula of success. This American investor, media proprietor, media personality, pro sports team owner, and entrepreneur has supported around 140 startups (including Ranku, Soundwave, Superfeedr, and The Mobile 360).
Mark began earning his daily bread when he was 12 years old. He set up a stall selling refuse waste bags because he wanted to buy a pair of trendy shoes. He worked at a bank, used to sell software, and launched his own consulting business, MicroSolutions. In the 1990s, he sold this startup together with another one, Broadcast.com — and that’s how he made a fortune.
Banister has made an impressive career. Here is the list of his positions:
- PayPal — advisor and board member
- Slide — a member of the board
- IronPort — co-founder
- ListBot — founder and vice president of technology
- eVoice — collaborator
- Idealab — vice president of ideas
- Powerset — early-stage investor, later member of the board
- Zivity — co-founder and chairman
Banister invested in over 130 startups, including Facebook, Uber, Zappos, and iLike.
This guy has invested in over 120 startups on five continents. He supported Polymorph, Contactually, LearnVest, and Social Finance. Kellner specializes in early-stage businesses that foster technological progress in the following niches:
- Clean technology
- Consumer Internet enterprise software
- Personal finance
- Mobile commerce
- Finance technology
- Financial services
To promote entrepreneurship globally, he became the leader of the Endeavor movement that encourages startups.
Ty Danco has had a very eventful life. For instance, he won the Olympics twice as a part of the US luge team, made a career on Wall Street, founded fintech companies BuysideFX and eSecLending, and became the director of the Colorado-based seed accelerator TechStars. He is also a known survivor of cancer.
He has invested in over 120 startups, including Codeship, Crashlytics, and Localmind. He’s particularly enthusiastic about businesses that improve people’s health.
If you’re looking for funds for your startup, consider attracting an angel investor. They are wealthy individuals who are ready to take the high risks of supporting early-stage companies that might generate a much higher return than traditional investment opportunities. The founding team will receive cash in return for equity or convertible debt.
Compared to a VC firm, an angel will be likely to give you a smaller sum of money. They are interested predominantly in businesses with a highly motivated team and a great idea that can revolutionize its niche.
As you find an angel investor who can support you, assess their industry and investment expertise, financial stability, and mentorship abilities. Treat your every interaction with this person as a job interview and prepare for it thoroughly. Start with aligning your goals and setting the format for your future meetings and conversations. Ask the investor whether they would like to share knowledge with you or remain a silent partner.