- Angel investors place high value on the strength of a company's management team.
- Educating investors about the product or service is key, especially for a tech startup.
- Like all investors, angels want to see a clear path to return on investment.
- This article is for business owners interested in obtaining angel investor funding.
Angel funding sounds like it was sent from heaven, but you don't need a miracle to find it. By thinking critically and using your network, you can find the right investors for your business venture.
What is an angel investor?
Angel investors are individuals or groups who invest in early-stage or startup companies in exchange for an equity ownership interest. Finding an angel investor is only half the battle, though. Once you connect, you'll have to successfully pitch your company to secure funding.
Often, but not always, angel investors are accredited by the Securities Exchange Commission (SEC). To be accredited, angel investors must have either:
- Annual earnings of at least $200,000 per year over the past two years and projected similar near-future earnings. This annual salary minimum increases to $300,000 if the angel investor files taxes jointly with their spouse.
- A total net worth of at least $1 million.
Key takeaway: An angel investor is someone or a group of investors who provide funding to young companies in return for equity ownership.
Editor's note: Need financing for your business? Fill out the below questionnaire to have our vendor partners contact you with free information.
What are the pros and cons of working with angel investors?
Among the reasons you may want to seek funding from angel investors include:
- Angel investors may take larger risks. Unlike traditional debt financers, angel investors aren't beholden to banks or other institutions. This allows them to invest their money much more freely. As such, angel investors may be more likely to take investment risks virtually unheard of among banks and traditional debt financing providers.
- Your company can take less risk. Often, angel investors don't require repayment if your company fails. This arrangement is far less risky than funding your company through loans or other debt financing routes that require repayment no matter how your company fares.
- Angel investors are knowledgeable. Most angel investors didn't just magically acquire their massive amounts of money – they had to learn a ton along the way to grow their wealth. When an angel investor funds your company, you get access to the knowledge your investor has accrued and can use it to grow your own company. This background can prove especially helpful if your company is a startup: Although 9 in 10 startups fail, angel investor knowledge can make your company the one success story.
Despite these advantages, you may feel wary about turning to angel investors due to their primary – and, really, only – disadvantage. In exchange for their investment, your angel investor receives a stake in your startup, which has ramifications for your company's decision-making. When an angel investor has a seat at your table financially, they also get a say in your operations.
This setup means less independence in your business decisions – and in the case of an angel investor who owns more than 49% of your company, it means you're no longer the primary decision-maker. As such, if you want to retain executive independence, this one drawback of pursuing angel investor funding could outweigh the numerous advantages listed above.
Key takeaways: Angel investors take more risks than traditional funders and don't require repayment if your business fails, but the seat they get at your table for decision-making conversations may not be right for some entrepreneurs.
How do you raise angel funding?
Angel investing is all about trust and relationships. It isn't impossible to build relationships over the internet, but it can be hard. To get the best angel funding for your business, you'll have to get out there and meet people. You can find angel investors at events, such as fundraisers and conventions. There are also online platforms to help you find the right people before you connect in person. You can also look for angel investment networks or groups. If you're pitching angel networks, your success rate will probably decrease, at least a little bit.
After you find your potential angel investors, set up a time to meet with them independently so they can listen to your pitch. Polish your business pitch before your meeting. Your pitch should be succinct, clear and memorable. Someone who doesn't know anything about you or your business should be able to learn everything they need to know just from that pitch.
Draw up a thorough business plan as well. If you nail your pitch, that's the next thing your potential investor will ask for before you get any angel funding.
Key takeaway: To raise angel funding, attend conventions or find investors online, then pitch your business and present a business plan.
Where do you find angel investors?
If you're not the fundraiser or convention type, then you're probably looking at online platforms. The three below platforms are among the most versatile angel investor search options for business owners of all stripes:
- Angel Capital Association: The ACA is the world's largest angel investor association. Its membership includes tens of thousands of accredited investors and hundreds of angel groups seeking opportunities in the U.S.
- Angel Investment Network: Both business owners and angel investors can use AIN to find opportunities. As a business owner, you can create an account and then search for investors or add a pitch to the network's database.
- Gust (formerly known as Angelsoft): To date, Gust has connected business owners with $1 billion of angel investor money. It connects business owners with a single application that it sends to hundreds of angel groups that can then decide whether to pursue your company as a funding opportunity.
Key takeaway: Prominent online angel investor platforms include the Angel Capital Association, the Angel Investment Network and Gust.
What do angel investors look for in a company?
If you're looking for an angel investor to fund your business, you may want to consider exactly what the investor is looking for to improve your chances of success. A survey by Propel(x), an online angel investment platform, revealed the top three reasons angel investors choose a specific business.
1. Angel investors look for experienced management teams.
Exceptional management is vital for any business. Three-quarters of survey respondents said the management team of a startup was their biggest consideration for investing.
"Startups are not only about the technology or business idea but also very much about the people behind them," said Swati Chaturvedi, CEO and co-founder of Propel(x). "A compelling, experienced team that can sell the vision and the potential impact is key to success, and something savvy angels look at closely."
Some exceptional qualities to have as part of a management team are integrity, clarity of strategy and approach, professionalism, and determination, Chaturvedi said.
2. Angel investors need to understand your product or service.
We all want to know where our money is going. Angel investors want to understand exactly what they are financing, especially for startups in the tech field. Since angel investors are investing their own money, building their trust and establishing a relationship with them are key to gaining their support. More than 50% of respondents claimed this as one of their top reasons for investing, and 94% find it helpful to have subject-matter experts explain the technologies within their company before investing. In fact, many choose not to invest in specific businesses due to their inability to grasp their technology.
"The easier we make it for angel investors to discover, evaluate, and participate in science and technology startups, the more we'll see money going into these worthy companies, and the benefits to humanity accrue," Chaturvedi said.
3. Angel investors want a clear path to realize a return on investment.
Naturally, angel investors look for opportunities that will benefit them as well. Before anyone gives you angel funding, they need to know your predictions for their return on investment, or how much money they stand to make in comparison to how much they'll risk on your business. Potential ROI was a top motivator for 49% of angels when making investment decisions.
While some investors are indeed looking for financial compensation, not all are primarily interested in the money. Some want a different kind of return: the ability to solve the world's biggest challenges through the businesses they fund. Nearly one-third of angels choose to invest in a company based on its connection to important social issues.
"Having an impact matters, especially when it comes to investing in things like curing diseases, feeding a growing global population, fueling the planet with clean energy and even taking us into space," said Lisheng Wang, Propel(x)'s co-founder and head of investor development, in a statement. "Science and technology startups especially should take note that when raising capital, they should emphasize the impact of their solution besides potential returns to investors. It's not only about the 'what,' it's also about the 'so what?'"
This survey was based on the responses of more than 200 active and aspiring angel investors.
Key takeaway: Angel investors look to fund potentially profitable businesses with experienced leadership and clearly outlined products and services.
Angel investor FAQS
Q. What percentage of your earnings do angel investors want?
A: Angel investors typically want to receive 20% to 25% of your profit. However, how much you pay your angel investors depends on your initial contract. Hammer out these details before they give you any money, and have a lawyer draw up a contract, which will make your angel investors feel safer in their investment.
Q. What is the difference between an angel investor and a venture capitalist?
A: Unlike traditional venture capitalists, angel investors make their investment decisions quickly and rarely require a board seat as a condition of investment. They also usually invest smaller amounts of money than venture capitalists do. This makes them an attractive funding option for startups that don't need large investments and want to retain more control over their business.
Q. Is angel investing profitable?
A: Angel investors can make a lot of money, if they know what they're doing. But angel investing can be risky, so it's easy to lose a substantial amount of money as well. If you want to become an angel investor yourself, do your homework on the company you want to invest in and sign a contract before you hand over any funds. Potential startups that are worth the risk have knowledgeable leadership and thorough business plans as well as convincing pitches. Vet the startup's leaders as thoroughly as you would for any other significant new relationship, and your investments can pay off big time.
Max Freedman and Sammi Caramela contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.