Starting a new business is going to entail finding solutions to numerous problems. One of the most important is going to relate to funding. Every business is going to need some form of financial support to help pay for employing staff or equipment financing. It can be one of the most challenging aspects of a business launch. While there are a number of potential ways to gain the necessary financial backing, one source is angel investors.
Whether you’ve adopted a bootstrap mentality or you’re looking at bank loans, angel investors are a viable and common way to find financial support for your business idea. They can also carry a very reduced risk element. With that in mind, here’s everything you need to know about angel investors, and why you should consider them.
Angel Investors: What are they?
An angel investor is an individual who is willing to invest part of their own money into a promising new business. They are most often approached in the early days of a business launch. Angel investors usually tend to remain within the sector that they have the most experience with, which means that they can offer more than just monetary help. Their expertise and potential role as a business mentor is an additional factor that new startups should always consider.
Angel Investors vs. Venture Capitalists
There is one main difference between an angel investor and venture capitalists (VC). Angels are individuals, whereas VCs are registered businesses. The average VC company will tend to invest in already established businesses, and the amounts that they lend can add up to millions of dollars. Angel investors work in the opposite way. They will find new company that they believe hold promise and will invest any amount of money (high or low) that they feel comfortable with, making them a viable alternative to commercial loans.
Cons of VC investment include:
- The majority of VC companies will require a seat on the board of your business as part of any financial investment.
- VC funding can take a long time to approve and requires a much more complicated application process.
Alan Patricof – American investor, founder of Apax Partners.
Angel Investors and time
Raising the necessary financial support for your business can take time. Angel investment is a popular option because it is a private arrangement. It means your money could be in your business account before the end of the day. The problem is sourcing those investors, and that’s where time becomes an issue. Finding the right angel investor can be a long process, and will involve numerous meetings. Those meetings will be mainly you selling your business idea and then negotiating terms.
Are Angel Investors taking a risk?
Investing money in a new business is always a risky proposition. The fact is that investing in a startup will more often lead to a loss for an angel investor.
Kevin Rose – Entrepreneur, co-founder Revision3, Digg, Pownce, and Milk.
Angel investors are aware of the risks and must be financially comfortable enough to risk losing the money that they invest in you and your company. If your business is in a field that they know, then you can expect them to play a more active role in your growth. Your success is in their best interests, but ensure that all parties are comfortable with the level of involvement. If you just need monetary help for financing a business acquisition, then you may find other options more useful.
While it’s great to have an experienced and successful mentor, you don’t want to have to battle over every business decision. Make sure that you and your investor are happy with the level of involvement. Many angel investors simply offer financial aid alone, which many entrepreneurs prefer.
Disadvantages of Angel Investment
Whereas VCs can use business profits to make their investment, angel investors are using their own personal finances. It means that they will be opening themselves up to a lot more risk. To somewhat counter that risk, many angel investors will ask for more than you can give. The cons of angel investments include:
- You may have to give up equity in your company.
- If they take a more active role in the daily management of your company, you may disagree on vital decisions.
- Exit strategies for investors and entrepreneurs are often very different, and you may not be aware of your investor’s future plans.
Experienced investors are aware of these risks, which is why they may limit their investment amount. Often, they are investing in numerous companies at the same time. This spreading of risk means that they increase their chances of investing in a successful project.
How to attract an Angel Investor
The end goal of any plan to find an angel investor is going to be your pitch. Your presentation is going to be the deciding factor when it comes to your potential investor making a decision as to your worth and future. Some useful pitching tips may help you plan your meeting, and they could be the key to securing that investment:
- Know the numbers: You will want to display an in-depth awareness of the profit and loss expectations, your growth strategy, and your profit margins. If you don’t know these, then make sure that there is someone from your team with you who does know the ins and outs of the company’s financial matters.
- Practice: The more that you practice your pitch beforehand, the more comfortable you’ll feel when presenting it.
- Prove your skills: If you are a good leader, prove that skill by introducing your team and highlighting their individual talents. The hiring of the right team is a good indication that an entrepreneur knows what they need, and an investor will be more likely to invest in someone that knows their strengths and weaknesses.
- Be yourself: You will be entering a potential long-term relationship with your investor, and that means you should not try too hard to be someone you’re not.
Common Pitching Mistakes
- Not knowing the answers to questions that the investor asks: You need to be able to answer everything. Sometimes that means you will need your team members with you.
- Micromanaging: The smart entrepreneur will listen to their team and take advice and suggestions. If you fail to do this, you have hired the wrong people, or you’re too controlling a boss, and those are red flags to an investor.
- Know the competition: If you either don’t know anything about your competitors or (even worse) have dismissed them as not important, then you are showing that you have not done the right market research. You will be unlikely to secure funding without proving that you know who your competitors are and how you’re going to challenge them in your sector.
Entrepreneurs often find that the process of finding and securing an angel investor is exciting. Be aware of the risks to your equity, and remember that there are no strict legal guidelines in place for angel investment. As it is a private arrangement, make sure that your contracts are all thoroughly examined before anything is signed.