Angel investors are usually successful entrepreneurs, retired business owners or corporate executives in search of investment opportunities with promising businesses. They’re looking for an investment they can get a return on their money, but often also contribute to an industry, region, town or business community.
What angel investors will expect
In exchange for funding, angel investors typically expect:
- An equity stake in your business. In effect they buy shareholding off you.
- A return on their investment within a reasonable time frame.
- An exit. They want to know what the end game is, for example a public offering, being bought by another business or regular dividends.
Assess your readiness
An important criterion for attracting angel investors is the lifecycle stage that your business is in.
The best time to approach angels is when you can clearly demonstrate that their investment will help grow your business. If your business is still in its early stages, they’ll want to see ‘proof of concept’ including:
- A sound business plan.
- Working prototypes.
- Customer contracts.
- A record of sustainable sales growth.
Angel investors also will want to know how you intend to spend any investment in your business. For example, do you plan on using their money to enter a new market, purchase manufacturing equipment that will allow you to increase production, or bring a new product to market? Make sure you can answer the question of how the investment will help your business grow and become more profitable.
Gather information
If your business is at an appropriate stage and you decide that seeking investments from angels is the right approach, the next step involves gathering information. Get out there and:
- Source and access advisers such as your bank manager, accountant and work peers to gain as much knowledge on angel investment as you can.
- Read and search online about what angels in your region are wanting to invest in.
- Network to find an angel that brings more than just money to the deal. An ideal angel is one who is passionate about what your business is attempting to accomplish, with expertise and a track record of success that you can tap into. Do your research on possible candidates, finding out their past successes, how they operate, and the types and stages of businesses that they prefer to invest in.
Prepare to approach angel investors
Your business may be ready for angel funding, but are you? You will need to be thoroughly prepared with:
- A compelling pitch to explain why angels should invest in your business, the opportunity and how will it benefit them.
- The details of your business’s financial projections, its current and potential value, your competitors, any protections you have over your products or services, the proof of concept, and how you want to structure a deal with an investor.
- All your paperwork such as your business plan, accounts, IP ownership, and contracts with staff and suppliers.
The challenges of angel investors
They’re in business to make money, so it’s not uncommon for them to expect a high rate of return. Keep in mind:
- If you include equity as part of the deal, you’re essentially selling part of your business. When you’re negotiating a deal, make sure the amount the investor is asking for won’t compromise your own ability to make a return.
- Angel investors will want to have a say in how their money is used. They’ll probably want some decision-making power, so expect them to take a hands-on approach.
It comes down to how much control you’re willing to hand over, and if you think you can realistically live up to the promises you’re making about their investment. If either of these terms is a worry for you, angel investors are probably not a great option.
Summary
Angel investors while looking for a great return and some say in the business, are often willing to go where banks and other lenders may not (at least initially). Consider them as a real option if you’re in a fast growing business that needs capital.