So, you’ve built an awesome product, but now you’re trying to figure out how to get an angel investor to back your startup. What are the ingredients that make up a successful pitch deck? How do you approach an angel investor for funding?
There are lots of ways to raise money, but if you’re looking for an angel investor, there are a few things you need to know that are specific to the process.
Some of them are very simple, and some of them are harder than I’d like. But they all require you to understand something about angel investors, and what they usually want in return for their money.
In this post, I’m going to lay out a step-by-step formula for getting a top tier angel investor to invest in your startup.
Before doing that, let’s break down the key differences between angel investors and VCs.
What is the difference between angel investors and VCs
Angel investors and venture capitalists (VCs) are both looking to invest in startups, but they differ in the amounts that they’re willing to invest and in what stage of development a business needs to be in order to attract their attention.
Angel investors are typically wealthy individuals who have the capital to invest in early-stage businesses. They are often people who have started or run companies themselves, so they understand how tough it is coming up with the right idea at the right time — and how difficult it is to get that idea off the ground.
Angel investors will only consider investing in businesses that have potential for growth. Typically, these investments are less than $500,000, though some individual angels may be able to offer more.
Venture capitalists are professional investors who focus on helping businesses grow by providing them with large sums of money for expansion. VCs are more likely to invest in larger amounts ($1 million or more) when you’re farther into development with a proven record of success.
What is the advantage of raising investment from angels vs VCs
We’ve seen that angel investors provide capital to startups in exchange for equity, just like venture capitalists. But they’re also different than venture capitalists in several ways, one of the most important ways is that they act quickly.
Angel investors make their decisions quickly. They don’t care how much revenue you’ve generated or how much your growth has accelerated; if they like your idea, they will fund you. Angel investors are also more flexible about valuations than VCs, giving you more room to negotiate (if you want to raise money from angel investors).
If your startup needs money quickly or is looking for flexibility in valuation, then angel investors might be a better choice than VCs. However, they don’t offer the same amount of money as VCs (on average) and they take a larger stake (on average) in the business.
The 5-steps to raising angel investment
The process of getting money from angel investors, or venture capitalists, can seem mysterious. It doesn’t have to be. You just need to know what you are doing. The process is basically the same for both angels and venture capitalists, except that angels are more informal about it.
If you want an angel investor to invest in your startup, here is what you need to do:
- Find angel investors and get their attention.
- Give the investor enough information to make a decision.
- Get the investor to like you and trust you.
- Convince the investor that they will make money on their investment.
- Do a deal with the investor on terms acceptable to both of you.
How to find angel investors
Angel investors are among the most important people in the startup ecosystem, but the path to getting their attention is not obvious. It’s a combination of networking and hard work, and there’s always room for luck.
Getting an angel investor’s attention is hard: there are always more startups seeking angels than there are angels looking to invest, and they can get dozens of emails a day from startups asking them to look at their idea.
One way to get seen by an angel is to get introduced by someone they already know, because this reduces the risk that they will fall for a scam or waste their time looking at something unlikely to succeed.
But let’s be blunt, if you could get a warm intro to an investor you wouldn’t be here. So what next? How can you engineer a warm intro?
The first step is to find other startups that are already funded. This will allow you to approach investors that are already familiar with your industry. Crunchbase, AngelList and Linkedin are all perfect tools to use for this.
If you’re finding it really tough – Linkedin allows you to find angel investors by searching for keywords like “angel” or “angel investor.” But make sure you do your research before you reach out to them — angel investors are busy people and will not appreciate being contacted if you haven’t done your research.
A note about angel syndicates
In theory, angel investors could be found anywhere – but when you’re just starting out, it’s hard to reach angel investors because you don’t know them and they don’t know you. And even if you did get in touch with them, there’s no guarantee that they would be interested in your investment opportunity or would want to work with you.
To overcome these barriers and find angel investors, you may need to tap into the power of angel syndicates.
Angel syndicates are groups of individuals who have pooled their money together to invest in startups. They usually have one lead person who manages the investments, and all members of the syndicate share in the profits from successful investments. Angel syndicates get their name from the traditional image of a wealthy individual who invests in a startup using his own money and then brings other investors on board.
Angel syndicates can be very helpful if you’re looking for startup capital because they give you a ready-made network of potential investors to tap into.
Entrepreneurs deal with a lot of uncertainty, and if you can get past the initial screening process successfully, having an angel syndicate on your side can help mitigate some of that uncertainty because you’ll already have several people behind you.
Angel syndicates can also make it easier for startups to connect with potential angel investors by matching them up based on various criteria such as industry expertise and geographical location.
How to pitch angel investors
The biggest mistake that founders make is that they focus on their idea, not on how to best tell the story of their idea. Yet the single most important thing for a founder to do is to convey his or her idea in a way that will cause an investor to believe in it.
To do this, you need to understand what your audience cares about and what makes them think your idea is worth investing in.
The most successful pitches I have seen follow one of two models. The first model begins by addressing the things investors care about, and then segues into why the founder thinks his or her startup will be able to succeed even though similar companies have failed.
The second model starts with the founder’s passion for his or her idea, then shows why that passion makes it likely that they will be able to succeed where others might fail.
Both models work well because they put the investor first; they try to understand how he or she thinks and what he or she cares about, and then they structure the pitch accordingly.
How to build relationships and trust with angel investors
Angel investors, in fact, are just people. And to get them to trust you, you need to understand how they think and behave, and then adapt your behaviour accordingly.
If you want to get an angel investor to back you, yes, you should do your homework and make sure that your business plan is strong. But you should also be prepared to build relationships with this investor, to convince him or her that you are trustworthy.
No one invests in a total stranger. If an angel invests in your company, it’s because they have come to trust you after getting to know you. For the most part, they won’t invest in just any entrepreneur that comes along.
You have to understand, there are no shortcuts.
The people who are able to get funded are the ones who have taken the time to build relationships with investors, and the only way you can do that is by meeting them in person. You can’t just send them emails or leave voicemails asking for money.
Every investor has their own unique personality, and if you want their money you need to come across as likable. If you want to seem likable, you need to make them feel comfortable. If they feel comfortable around you, they will be open to your ideas.
The most important thing is to be authentic and build a genuine relationship before asking for money.
How to convince angel investors to back you
When you pitch to an angel investor, you need to know what you’re doing. You need to prepare for this meeting like it’s a job interview. You should do research on the person you’re pitching to, and know how to answer the questions they’re likely to ask.
Angels are not just rich people who like startups for their own sake. They are businesspeople who invest in businesses because they think they will meet some personal need. Angel investors invest in startups to get either financial returns or non-financial rewards like fame or intellectual satisfaction.
If you want an angel to put money into your startup, there are two questions you need to answer.
One is why the investor should care. The other is what they expect in return for their money.
You might not think that the second question needs answering. You’re offering them equity in your company, so what else do they want? But they may want more than just financial returns on their investment.
Sometimes investors want to help the founder’s vision grow; other times, simply cashing out is enough for them.
How to negotiate a term sheet with an angel investor
The legal terms of the investment are laid out in a written document called a “term sheet.” This is a nonbinding agreement between founders and investors that outlines the key deal terms for the funding round.
If you’ve never closed a round of financing before, you’re likely to be terrified by the thought of negotiating your first term sheet with an investor.
There are two big mistakes you can make in a term sheet. One is to accept an unfair deal that kills your motivation – or even your business. The other is to walk away from a perfectly good deal because of a small difference of opinion.
Unless you are a lawyer or have one on your team, you should use a standardised template (such as those provided by SeedLegals). The reason is that you do not want to end up in a situation where there is ambiguity about what the parties agreed to.
When you are negotiating with an investor, it is extremely easy to think that you are agreeing to one thing when in fact you are agreeing to something else. Often both parties have misgivings about what they are agreeing to, but having gone so far think it’s too late to back out.
If you have a term sheet that captures what both parties are thinking they are signing up for, you have a point of reference. If the investor tries to change the deal, then he or she is trying to change the deal. It’s better for everyone if changes happen at the beginning rather than at the end.
Angel investors are super-important to startups, but getting them excited to invest in you can be difficult.
You can find angel investors through friends, professional networks, referrals, and in some cases through online services. After you’ve found an investor, you’ll need to prepare a pitch to present your business plan.
Angel investors are looking for businesses that have both high potential growth and the ability to be profitable. They want to know that you’ve done research into your market, that you’re aware of any potential pitfalls, and that you’re prepared for the challenges you’re likely to face.
There are many different stages to raising angel investment for your startup. Be prepared for rejection at any time, but also remember that there are plenty of opportunities out there so don’t give up if one door closes!