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5 Steps to Raise Capital from Angel Investors

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 without very strong revenues or collateral, and venture capitalists rarely invest in companies that haven’t already developed a product with some proven market viability.

As a result, if you’re still in the pre-revenue phase, angel investors may be your best option for raising money. But who are these wealthy individuals, and how do you go about finding them?

#1 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. Angels offer capital to entrepreneurs through equity financing or convertible debt. In the 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.

#2 How to find angel investors

When you’re targeting angel investors, start with those who either

  1. Worked in the industry your product would serve

  2. Are currently investing in companies that also provide services to that industry

  3. 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 AngelList, a site that offers one-stop shopping for startups to connect with accredited investors throughout the country.

Angel investment tends to be a local phenomenon. Definitely get acquainted with your local angel network and associations. Angel Capital Association provides a list of angel investor groups across the U.S., sorted by region and state.

One approach to consider is to reach out to people who have recently sold successful startups within your industry. Spend some time to get 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.

#3 When to reach out to angel investors

Although angel investors are more likely than venture capitalists to take a chance on an early-stage startup, you still need to be far enough along to entice an angel to invest. You should already have your minimum viable product (MVP) or be pretty close to finishing it.

Angel investments are great for paying a developer to finish or refine your first product—or for building out your sales and marketing team to help your product gain traction.

#4 How to prepare for a meeting with a potential investor

Here are a few key things you need to prepare for meeting potential investors:

  1. A clear and concise elevator pitch for your company.

  2. A solid demo of your product. We often hear from investors that a good product demo is the most compelling way to communicate what you are trying to achieve.

  3. 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.

  4. Know how much you need and how you’ll use the funds.

#5 Know if angel investment is right for you

When you run an early stage startup, capital can be expensive. Like venture capitalists, angel investors seek a sizeable chunk of equity in return for their investment, so think twice before you accept that money.

Ask yourself:

  1. 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?

  2. Can you afford to quit your day job and work for free on launching your new company?

  3. 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 yourself attractive to other investors and capital sources.

Further Reading:

  1. What is Seed Money

  2. How to Pitch to Investors and Raise Angel Money

  3. How to Pick High-Quality Angel Investors: 5 Things to Look For

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