After developing your MVP (minimum viable product), many startups need outside funding to get to the next phase. You may need funds to refine your product, or you may need money to launch the product and gain traction.
The common approach for entrepreneurs at this stage used to be to seek funding from banks or venture capitalists. Unfortunately, banks are unlikely to offer loans to startups that aren't profitable (not without collateral, at least), and venture capitalists rarely invest in companies that haven’t already developed a product with some proven market viability.
As a result, angel investors may be your best option for raising money if you're still pre-revenue. But who are these wealthy individuals, and how do you find them?
Who are angel investors?
Originally a term used to describe investors in Broadway shows, “angel” investors are independently wealthy individuals, often entrepreneurs like yourself who have exited a successful business or two, who are interested in innovative businesses and looking for a greater return on investment than traditional investment channels can offer.
How do angel investments work?
Angels offer capital to entrepreneurs through equity financing or convertible debt. In recent years, angel investors have become much more institutionalized. There are a lot of local angel groups or angel networks where individual investors can share their resources and pool their investments. Angel investors aren’t just in it for the money, though. Most get into angel investment because they want to serve as mentors to entrepreneurs.
How to find angel investors
When you’re targeting angel investors, start with those who either:
Worked in the industry your product would serve,
Are currently investing in companies that also provide services to that industry; or
Are local to you.
People who understand your target industry or your startup scene are in the best position to understand you and see your company’s value.
Personal connections and referrals are important, so start by looking within your own network for well-heeled industry-insiders or established entrepreneurs. Next, see if anyone in your network might know someone who fits the profile of the type of investor you’re looking for and ask for a formal introduction.
If you want to find angel investors beyond your network, try searching Wellfound (formerly AngelList), a site that offers one-stop shopping for startups to connect with accredited investors throughout the country.
Another approach to consider is reaching out to people who have recently sold successful startups within your industry. Spend some time getting to know them and invite them to serve as an advisor or on your board of directions. Once you have an established relationship with them and they know more about your company, they might be interested in investing—or you can ask them for introductions to angel investors who might be interested in your company.
Two Types of Angel Investors
Angel investors tend to come in two flavors: an individual or a group, often referred to as a network or club. While dealing with a single potential investor is viable, working with one of the many angel investor groups out there has a few benefits:
They tend to screen investors before they can become members, which means you shouldn’t have to worry about accreditation or their ability to write you a check.
They like to invest in packs, so you can get a lot of different expertise when taking their money; and they will usually appoint a lead and you will deal mostly with that one person.
The presentation process is much more organized with angel investor groups, and you will usually get an answer and feedback more quickly.
Angel investment tends to be focused on local startups. Definitely get acquainted with your regional angel network and associations. Angel Capital Association provides a list of angel investor groups across the U.S., sorted by region and state.
Getting a meeting with investors
Finding angel investors or investor groups isn’t as difficult as it is to get in front of them. As you can imagine, the better angel groups have a long list of people like you that want to pitch to them.
Most investor groups have a structured process for finding startups worthy of their investment, and it’s important to have some general knowledge on what that process looks like, so you can prepare yourself and have a decent idea of what to expect. Individual angel investor meetings are far less likely to adhere to any particular structure or process; nevertheless, the following will prepare you for almost anything!
What to Expect
Step 1: Prescreening
Most investor groups will have a prescreening process you have to get through. During prescreening, you will be scheduled to give your pitch to a couple of members, kind of like trying out for American Idol. This very small group will listen to your pitch, ask questions and generally assess you and your idea. Then they will either give you a quick answer or get back to you as to whether they think it’s all worth presenting to the entire group.
These groups tend to meet monthly in a lunch setting to hear 3-5 pitches while they eat. The prescreening process goes on all month and the prescreen team might see 50 pitches during that time. You can do the math here. Do not be dismissive about the prescreen team, they are the gatekeepers. Give them your best effort.
Step 2: The Presentation
So, you made it to the big stage. First, there is probably a presentation fee involved. Expect this—it’s how they pay for lunch and other club expenses. You will be one of 4-5 scheduled presenters. You may or may not be invited to hear the others, but typically not. You may or may not be invited to lunch, so plan accordingly. You will be presenting to anywhere from 10-40 people in the room, all eating. They will give you their undivided attention, no worries there, but you should assume about half are there just for the lunch.
You will give your 20-minute entertaining and personable pitch followed by questions from the audience. Then you will be invited to leave the room. Depending on the group’s established process you may be invited to leave entirely, and they will get back to you. It’s the process, don’t read anything into it.
Step 3: Voting
The group then discusses your presentation. Some of them may have rules about negative comments, allowing only positive comments. They then vote if they're interested in pursuing this further by simply raising hands. There is a certain group mentality that occurs here, once a couple of hands go up others will join them.
Step 4: Follow up
If the voting process works in your favor, this interested investor group will then appoint a lead; this is the person who will contact you and conduct the process of diligence and valuation. Expect the diligence process to take a month or more.
If nobody raised their hand and showed interest, they will let you know quickly.
Some clubs have other chapters and the fact that you made it past the prescreening is important to them, so you may not be down and out just yet. They may invite you to present to the other chapters (there may or may not be an additional presentation fee, and travel is of course on you). If you can manage it, it's wise to take them up on their offer. Sometimes they will give you good feedback from their discussions—listen to this carefully and use it to improve your next pitch!
How to prepare for an angel investor meeting
Once you've landed a meeting with an angel, it's time to get to work and get ready to put your best foot forward. Here's what to prepare before meeting potential investors:
A clear and concise elevator pitch for your company.
A solid demo of your product. We often hear from angel investors that a strong product demo best communicates what a startup aims to achieve in the most compelling way.
An executive summary or a pitch deck that explains your product-market fit. You should be able to articulate how your product is different from the competition, the size and demographics of your target market, and projections of what market share you realistically can grab in the short- and mid-term.
Know how much money you need and how you’ll use the funding.
Don't expect raising angel money to be easier than raising venture money, at least not anymore. In some ways it might be harder because of the sophistication level of these investors—angels are putting down their own hard-earned after-tax dollars and will have a whole different attitude regarding investing compared to venture capitalists. Venture capitalists are not investing their own money, typically.
When you pitch to angel investors, you will want to be prepared for a much more personal level of questioning during the due diligence process since they are investing in you as much as they are investing in your idea. Venture money tends to be far less personal and more about the company.
Weigh the pros and cons: Is an angel investment is right for you?
When you run an early-stage startup, equity funding can be expensive. Like venture capitalists, angel investors usually ask for a sizeable chunk of equity in return for their investment, which can massively dilute your ownership value when you reach an exit event in the future.
Before you take that money, ask yourself:
Can you funnel a substantial amount of money from your day job into your startup? If so, can you start by devoting nights and weekends to bringing your dream to life?
Can you afford to quit your day job and work for free on launching your new company?
Do you have family and friends that are willing to take a chance on your fledgling business?
If the answer to all of these is no, angel investors could help you get on your feet. Eventually, with a little luck, you’ll be generating enough revenue to make your startup attractive to other investors and capital sources.
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