Capital is the lifeblood of startups. Without it, a great idea can be over before it even begins. There are many ways to get it – traditional bank financing and VC funds included – but bringing an angel investor on the team can provide strategic advantages that other funding sources can’t compete with, like a vast network and mentorship guided by personal experience.
If startups want me on their team, they’ll need to make their vision clear and show that they’ve done their due diligence in finding the right fit for their startup. They need to stand out from the crowd of every other “next big thing,” make a meaningful connection and be able to negotiate appropriate terms for my investment.
Here’s how to identify the right angel investor for your startup and stage, connect with them, and convince them that yours is the right profitable investment.
How Does Angel Investing Work?
Angel investing can take different shapes and forms for any given investment, but the foundations of it include individual investors using their private wealth to fund early-stage companies that they believe in, often during pre-revenue or early revenue stages. It’s often the primary source of funding for young startups since other funding types, like bank lending, can feel more intimidating and predatory.
The angel investing process begins by researching and finding angel investors through personal networks, online platforms, or the larger startup community. Then, outreach is made and, ideally, you can set up pitch meetings with your top angel investor choices.
In the pitch meeting, you’ll need to bring a prepared pitch deck that overviews your company, its major selling points, fundraising plans, and initial projections.
If an angel likes the pitch and the business, they’ll make a deal. You should be prepared to negotiate aspects of the contract, such as how much equity you’re willing to give up or your exit strategy, to seal the deal and ensure it’s a mutually beneficial arrangement.
What to Look For in Your Angel Investor
Browsing for the best angel investors can feel overwhelming at first, but having options is a good thing. You can whittle it down to the most qualified and appropriate matches by looking for the following:
- Domain Experience: The best angel investors for a startup are the ones with experience in the same domain as your business
- Network: The right connections can go a long way, so look for an angel who’s plugged into the industry you’re entering or has local contacts you can tap into.
- Passion and Personality: Ensure you find an angel investor with an investment approach that fits well with your goals and working style. You may be working closely with them, so look for a personality fit.
- Successful Track Record: Similar experience is helpful, but proven, successful experience with past investments is game-changing.
- Close Location: If you want to work directly with your angel investor, geographical proximity will be helpful.
- Reasoned Advice: Angel investing can be risky by nature, but the advice they give should be rational, reasoned, and sourced from past experience.
Types of Businesses That Can Get an Angel Investor
I tend to focus on investments powered by innovative technology, including those in fintech, cannabis, and AI, but angels can invest in any industry. However, angel investors primarily get involved with startups in their earliest stages, before any revenue is made or in the beginning stages of revenue. This typically happens during the pre-seed and seed rounds of funding, the first two funding rounds for a startup.
- Pre-Seed Funding: Pre-seed funding comes so early in the process that it’s not always included in funding round categories. At this time, founders are working on their ideas and the beginning of their operations, and while it’s possible to get angel funding at this point, most capital comes from founders as well as family and friends.
- Seed Funding: Seed funding marks the first official stage of fundraising, and angel investors typically play a key role. Seed funding from angel investors can use the capital to perform market research, develop a minimal viable product (MVP), hire a founding team, and finalize business plans.
How to Find an Angel Investor:
Finding an angel investor can be as simple as going online or as complex as sorting through your friends, and friends of friends until you find the right connection you can utilize. Finding the right angel investor, though, is where the challenge really comes into play.
Here are a few resources to tap into to hopefully find your perfect angel investor match:
1. Check Your Network
First, do a sweep of your personal network and try to connect with anyone who could be a potential investor. This could be entrepreneurs or wealthy friends or family with a track record of investing. Even reaching out to people who you think may have other helpful connections you could speak with can get conversations going, and they may be able to endorse you to others they know.
Another network to check is your LinkedIn network. Do you have a first- or second-degree connection to any potential investors? While cold outreach isn’t always the best approach, a warm introduction from someone you both know can be a good start.
2. Browse Angel Investor Networks.
Angel investor networks like KEY Investment Partners or Pasadena Angels are popular ways to connect with investors and get your business ideas in front of them. With over 200 angel networks throughout the US, you’ll find groups specializing in every niche. Use these networks to search for angels and upload your pitch.
3. Participate in Competitions or Startup Incubators
Two more unique options for finding the right angel investor include joining a pitch competition or startup incubator. A pitch competition, much like Shark Tank, gives you a limited amount of time to present your pitch and persuade investors to choose your company. You may need an MVP before joining pitch contests so you can better demonstrate what you do, but you may be able to find some that welcome idea-stage startups.
Incubators are organizations geared toward helping startups get through the early stages and move forward successfully with the help of other founders, entrepreneurs, and investors. Incubators can give you a unique opportunity to work with potential investors in a greater capacity and show them the finer details of your company and offering.
How to Persuade Angel Investors to Join You
Finding the right potential angel investors is only half the battle. Once you’ve connected, it’s time to persuade them to invest their personal wealth into your business. It’s a big ask, so go into it with confidence and a perfectly-constructed pitch deck.
Prepare your pitch
Your pitch is your moment to shine. Tell your story, share your goals, and make your projections clear. Illustrate a real need in the market and how your company will fill it.
Make a slideshow presentation that provides a comprehensive overview of your business and business plan, including:
- Current market need
- How you’re filling the need (“how”)
- Your business model (“what”)
- Founding story (“why”)
- Market size (“who”)
- Your competitive edge
- Fundraising plan and funding needed
- Evidence of traction
Set Up a Meeting and Present Your Pitch
With your pitch prepared, reach out to potential investors either through a common connection, if possible, or a cold email or message, if necessary. A pitch meeting doesn’t have to be formal. For me, it could be as simple as meeting at a coffee shop, or as organized as presenting your slideshow in a boardroom.
Aim to keep it as concise as possible without losing any important content that investors need to make an educated decision.
Discuss Terms & Negotiate
Let’s say you blew your pitch out of the water, and the investor is showing real interest. What’s next? Don’t drop the ball; keep the conversation going by discussing the potential terms of their investment and negotiating how much equity you’re willing to give up in exchange for capital.
When it comes time to negotiate the equity and terms of your agreement, consider which stage your startup is in and how much you’re willing to dilute your ownership. My rule of thumb for founders is to only go up to 20% equity at the pre-seed stage. If you give away more ownership than that, you’ll still need to give up more equity in later stages, which could leave you too diluted. Take only the money you really need so you don’t give too much of your company away too soon.
Close the Deal
When hands have been shaken and verbal agreements have been made, it’s time to draft up the proper documents and get everything signed to seal the deal. Your angel will cut the first check that you can use toward growing your brilliant startup, and, if they’re anything like me, they may offer you guidance along the way.
Finding “The One” for Your Startup
Not all investors are equal. Some investors write a check and hit the road, while others mentor and work closely with founders. There’s no right or wrong investor, it just depends on what your startup needs at the moment.
As an angel investor, I like to be involved and help founders in the ways that I can – through my capital, my own entrepreneurial experience, and past experience investing in companies with successful exits. I find that we’re a better, stronger team when we work together.
If this sounds like the kind of investment relationship you’re looking for to get your startup off the ground, reach out to MacDonald Ventures.