Angel investors are wealthy individuals who put money into startups early on, and receive part ownership of the business in return, which usually comes in the form of equity. Angel investors also advise and assist the founder in growing the startup so that it can begin to generate revenue quickly and reliably.
Business angels are different from venture capitalists (VCs) in that they tend to invest their own money rather than that of a fund. Because a high number of early-stage startups inevitably fail, growing numbers of business angels are forming groups or networks that enable them to pool investment capital for more advantageous deals and better risk management.
Startups usually seek an angel investor when they need seed or pre-seed money. Pre-seed money represents the first injection of capital into the startup. It can come from the founders’ friends and family, or an angel investor. Pre-seed money can be raised when the startup is still just an idea, although it helps if the business has already started to generate some revenue. Pre-seed capital is important because it allows founders to develop the product, the brand, the revenue strategy, and the team.
Seed money tends to be a larger sum of money that is raised from business angels or institutional investors when the startup has a proven team and a product that is already demonstrating first market fit validation and first traction. Both types of funding provide an important psychological boost because they represent an objective vote of confidence in the potential of the business. The support of an angel investor may also make it easier to raise money from other sources.
Aside from money, the startup also benefits from the support, advice and network of contacts that experienced angel investors usually provide. Most business angels have built their own startups and been through the entire entrepreneurial journey from first concept to profitable exit. They are able to guide founders through key decisions at the beginning of the process, and often develop a strong personal bond with the founder as mentors, not just as investors.
In an increasingly digital world, business angels often connect with founders on social media business forums, or via digital platforms such as PitchDrive. But as the pandemic recedes, traditional ways of meeting angel investors are also likely to return, including chambers of commerce events and industry conferences. Word of mouth is always an important avenue for introductions to angel investors, and this depends in large part on the founder’s network, or that of a mentor.
Most angel investors are looking for a startup with the potential for exponential growth that fits with their existing portfolio of investments. A promising startup usually possesses a credible team with a compelling revenue strategy, and a validated product that is capable of scaling at pace.
Many business angels are not just motivated by money and like to align their investments with their values. For this reason, they might be interested in a business that performs a socially or environmentally valuable function that will enhance their standing among their peers.
Persuading an angel to invest usually requires a founder to present their startup as an innovative solution to a significant problem that people are willing to pay for. The business model needs to be designed in a way that minimises risk and can deliver sustained growth over the medium to long term. The more evidence you have that it works, the better.
To deliver this message effectively, founders need to prepare an incisive and compelling investor proposal, which will likely include a verbal pitch along with slides and other materials that explain the offer and where possible provide credible data that backs up every claim the founders make.
If the angel investor is sufficiently interested, they will want to take a much closer look at key components of the startup such as the team, the product and also the accounts if the business is already generating revenue. If the startup is pre-revenue, its growth projections will be closely scrutinised and queried. This process is called due diligence.
The due diligence phase is also an opportunity for the founder to assess whether the business angel is a good fit for the startup. It is important that both parties trust and understand one another, and share the same objectives.
Business angels tend to use their own money. This means they generally have greater discretion than a VC fund to follow their instincts and assume higher risks. VC funds also tend to invest at a later stage in the life of a startup, so are less likely to consider a startup that is pre-revenue.
Banks can be a useful source of funds for a startup, but they usually require guarantees. The founder has a legal obligation to repay the bank’s capital along with interest. A business angel, on the other hand, is assuming all the risk of their investment, so if the business fails, the money does not have to be paid back. Clearly, in exchange for assuming this risk, the business angel expects a slice of equity or convertible loans in return. But experienced business angels do generally understand that founders need a free hand to run the business and stay motivated.
Pitchdrive raises funds on behalf of founders and provides valuable feedback on the startup proposal. Founders get access to a network of high-caliber industry contacts and also receive support in terms of legals, compliance, data management and access to various useful digital tools.
If you’re seeking funding, guidance and support for your early-stage start-up, get in touch with the Pitchdrive team today to get started.
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