How to Raise Funding from Business Angels
If you are an early stage business or startup which is seeking equity to grow your business, then angel investors can become the most significant source of funding for you. There are many groups, as well as individuals, who are willing to invest in startup opportunities that show great promise and growth potential.
Such investors carefully research and study your business plan before investing. What they actually do is monitor your progress and find a way to exit the deal later on after getting some meaningful profits. An angel investor can be a great source of investment after you have checked with your friends, relatives or other financial institutions.
In this article, I will explore 1) an introduction to business angels, 2) what you can expect from business angels, 3) what angel investors look for, 4) how to raise funding from business angels, 5) where to find business angels, and 6) a conclusion.
INTRODUCTION TO BUSINESS ANGELS
Most often, angel investors are rich people who fund startups in return for a certain percentage of the company. Some angel investors also play an active role in running the investee business. The return on their investment might be 2 to 40 times what they expect to get in 3 – 8 years’ time. There are angel investors who quietly provide you with just the capital necessary to run the business, whereas others might become active advisors or sit on your company’s board.
There are mainly six different types of angel investors:
- A virgin investor is one who has not yet invested in any businesses.
- If a person has not funded a business in the last 36 months, he is known to be a latent investor.
- Experienced investors who fund businesses solely for the sake of profit are known as wealth maximizing investors.
- Entrepreneurs are investors who normally invest in a business as an alternative to investing in the stock market, or simply invest for the sake of entrepreneurship.
- Income seeking investors are those who invest to get a job or extra income.
- Corporate angels are investors who demand majority stakes in the company if they have to fund it. These are often working in large organizations and companies.
Typically, business angels have already made a lot of money through other business ventures. It is also pertinent to note that most angel investors are men 45 – 65 years old. However, a huge number of investors in the technology sector are relatively younger.
How Is a Business Angel Different from a Venture Capitalist?
Against common perception, angel and venture investors are totally different from each other. In fact, there are some major differences between the two. For instance, business angels are mostly individuals investing their personal money as compared to venture capitalists who invest on the behalf of an organization or fund. Most often, these organizations use other people’s money to invest in your business. Venture capitalists offer investors a chance to create a fund to raise the money to buy shares in a private company.
An angel investor may not be able to invest as much as a venture capitalist because the former is using his own money whereas the latter is using others’ money. Similarly, their capacity to absorb risk also depends upon how much they are able to invest in any startup.
Statistics about Business Angels
Business angels are the best source of investment if you are looking to obtain company finance of £10,000 to £250,000. They also expect an average annual return of at least 20 – 30% per annum. In comparison, venture capitalists invest in only 1,500 companies each year whereas angels invest in 55,000 startups on average. Most importantly, angels invested $3 billion (15%) more than venture capitalists in startups last year. Venture capitalists invest in only 0.25% companies that apply for funding. On the other hand, business angels fund 2.5% of businesses they review on average.
The total number of qualified accredited investors exceeds 3.9 million people. More than two hundred thousand people invested in startups during the last two years. You must try to reach all of those 200,000 investors because your business is most likely to get funded by an individual angel rather than a group. Remember that less than 10% of angels belong to groups and not all of them are qualified investors as well.
WHAT CAN YOU EXPECT FROM BUSINESS ANGELS?
Angel investors earn approximately two hundred thousand dollars ($200,000) per annum in terms of salary, or their net worth is more than one million dollars.
The following lines explain what you can expect from these angels in terms of business investment.
- Typical Range of Funding: As mentioned above, angel investors invest their own money. The average deal size is around $500,000 regardless of which stage of development your business is in. Most individuals like to invest in telecom, healthcare, information technology, consumer products, electronics, energy and utilities, and similar businesses. A vast majority of investors also like to withdraw from your business after achieving their expected return on investment. It is up to you to propose a strategy that will help them exit without any hassle. Angel investors have many exit options at their disposal, but they also expect you to make the exit easy and profitable for both parties.
- Return Expectations of Business Angels: The angel’s primary motive is to earn considerable profits by selling his stakes within 3 to 8 years of funding your organization. A startup always incorporates risks and, therefore, they normally expect to obtain a 30 – 40% ROI (return on investment). However, as compared to a loan, you would not have to return the money to the investor if your business somehow fails. It is also pertinent to note that business angels are entitled to 10% of the company’s value as well.
- Contacts and Expertise of Business Angels: Most angels are active participants in investee business matters and, therefore, also bring their wide range of experience, expertise and contacts to a new setup. As a matter of fact, an angel’s resources and insight can become an invaluable asset for any business. They can also use the contacts made during their long career as an entrepreneur to bring more credit and venture capital funding as well as new customers and partners.
- Personal Relationships between Entrepreneur and Angel Investor: No one can deny the importance of establishing good relations with angel investors. In this regard, open and honest communication with them is crucial for your success. You must only approach those investors who have solid experience in your particular industry and structure your business deal in order to meet their requirements. The relationship between you and the angel is a long term commitment where mutual trust plays an important role. Both of you bring your individual qualities, expertise and experience to the table but if you are not honest with each other, you are not going to succeed.
WHAT DO ANGEL INVESTORS LOOK FOR?
Most angel investors happen to be successful and experienced entrepreneurs themselves. Therefore, they have good insights into the minds of other businessmen who request them to fund their business. There are many things angels look for in a startup, and some of them are explained below.
People Involved in the Business
The first thing you need to keep in mind that angels do not invest in your business idea, but in the people at your disposal. That is why they like to collaborate with the people who can be vetted or someone that they know. This does not only build mutual trust, but establishes credibility as well. It is always imperative for you to include rock stars with a proven track record in your team, whether it is co-founders or employees. This is because angels work directly with the team, and a good team will help everyone get along nicely.
Furthermore, angels scrutinize the leadership or entire management of the new startup. They like to work with a team that has a tremendous record of delivering goals on time and in a cost effective manner. Similarly, they also want to determine whether the management is capable of handling all the responsibilities that are part and parcel of a startup or not.
Therefore, if you want to make an impression on angel investors, your team should boast years of experience and credibility. It is your team that actually wins an angel investor, not your idea.
Great Business Idea
Having only a business idea can’t help you to get investment from angels. You need to propose a complete and clear business plan in order to leave an impression. You have to put everything in black and white, including the business model, what the potential problems are, what the market is like and how stiff the competition is. Similarly, you should also explain how your product is superior to that of competitors’ and how the investor himself will make money.
You are destined to fail if you do not have a good business plan, and every investor is aware of this fact. However, it is also foolish to think that success is guaranteed only if a business plan is in place. It simply illustrates that there is an opportunity to leverage upon. Also, make sure to vet your plan through crowdfunding, surveys and market research to make your application more authentic.
HOW TO RAISE FUNDING FROM BUSINESS ANGELS
Following is a step by step process on how to raise funding from business angels.
Step 1: Identify Your Goals
First and foremost, you must clearly identify what your business goals are and what you want from business angels. Decide if you only want them to fund your startup or if you would like them to bring in their expertise, experience and contacts to the board as well. The industry in which you are operating is also important as certain angels are inclined to invest in certain industries. You also have to make them realize that their money will help you achieve your goals and it will be put to good use.
Step 2: Do Your Homework
You should prepare vigorously before approaching any business angel. It is advisable to make a prototype of your website or products, land some customers and get their feedback before looking for investments. Moreover, try to make your presentation as pretty as possible. Tell a convincing and interesting story and make the investors pay attention to what you are saying. You also have to make an impressive business plan, and financial calculations should be accurate as well. Be prepared to answer unexpected questions and never give an impression that you are losing control.
Step 3: Create a Long List of Business Angels
You will definitely increase your chances of success if you identify angels who are suitable for your startup. You can ask them questions like how much they usually invest, what they look for in a company and what their expected return on investment is. Moreover, you must also concentrate on your industry while pitching business angels because they like to invest in industries they have prior knowledge about.
Step 4: Network and Make Connections
You need to make as many connections as possible as a business owner. Some investors decide whether to fund your business or not after reading your plan, but a majority of them prefer applicants that are referred by their friends, relatives, colleagues, peers, business associations and renowned professionals in their respective fields. Similarly, it is also a good idea to regularly attend angel clubs’ meetings and venture capitalist conferences to explore more investment opportunities.
Step 5: Be Honest and Transparent
It is difficult to be honest at all times, but this is one thing that really matters. No investor will ever write you a check if he thinks that you are telling a lie. Never try to cover up your dirty laundry, but instead reveal it yourself. Explain everything about yourself to the business angels and never ever hide anything which can create complications if discovered later on. If you are dishonest, you are not only betraying your self-doubt but also setting a bad tone for your relationship with the business angel.
Step 6: Always Expect a No
If you are a business owner looking for someone to fund your company, you will hear ‘no’ more often than you will hear ‘yes’. However, you must never lose your patience and should always be gracious and respectful to investors. This is important because they are not the only people who could fund your business, and this may not be the last time you are asking for investment. You will raise your esteem in the eyes of an investor if you respond graciously, and sometimes it also makes them question their decision.
Step 7: Choose a Business Angel Carefully
You should always be careful and choosy when it comes to deciding whom to get funding from. You must get as much information as possible about the angel and why he is funding your business. Similarly, you need to have good idea about his expectations regarding his return on investment. Before getting money from them, find out how much added value they can bring to your business. Always remember that experience and knowledgeable angels with a wide range of connections can help you kick start your business in no time at all.
Step 8: Always Inform Your Business Angel about Your Next Step
No matter how your company is doing, you must keep your angel informed about the latest developments. Again, you have to be honest with your business angel. Always inform the angel about your future plans as well as the outcome of those plans. You can use different methods, most important of which are emails, phone calls and weekly and monthly letters, to contact angels on a regular basis.
WHERE TO FIND BUSINESS ANGELS
Business angels nowadays are young entrepreneurs as well as more traditional businessmen who want to invest in promising and fast-growing startups. There are many places where you can find angel investors. For example, in the USA there are many large angel investment groups in the likes of Ohio Tech Angel Funds, Tech Cost Angels and Investors’ Circles, etc. You can get a complete list of the largest angel investor groups in the USA on the Angel Capital Association website.
In the UK, there are many business angel groups and individuals such as Addidi Business Angels, Advantage Business Angels, Angel Academy and Angel Investment Network from which you can easily get money for your business. Similarly, iNovia Capital, Extreme Startups, and Version One Ventures are some of the top angel investor groups in Canada.
There are also a number of business angel groups and individuals working in Australia. In this regard, Australianinvestmentnetwork.com is a great website to find business angels in Australia. Similarly, Australian Association of Angel Networks is another great source to look for good business angels.
It is also quite convenient to find business angels in other countries such as India, Brazil, and Germany. There might be many angel investor groups and individuals present around you. You just need to do some research, make some connections, and you will ultimately come across an angel who is willing to invest in your business.
You can make a big leap forward if you can convince business angels to fund your business. You can raise a considerable amount of money as more and more groups and individuals are willing to invest huge amounts in startups and even established businesses. Similarly, business angels can also provide you financial support after the first round of funding. In simple words, business angels cannot only support you financially but can also offer years of industry knowledge and experience to get your business started and thriving.