What we're talking about
If you’re looking for external funding to take your business to the next level, you’ll run into the concept of an angel investor early on. They’re wealthy individuals, often former entrepreneurs or industry specialists, who invest their own money into businesses in return for equity (a percentage of ownership of the business). They become relevant pretty much as soon as you start raising money in what are commonly known as pre-seed and seed funding rounds. It’s angels who are willing to water the ‘seed’ of your business, with the hope or belief that it’ll grow into something beautiful. And, of course, make them a bit of money if or when you sell the business further down the line.
Businesses tend to bring in between one and 20 angel investors, with the lower end being more common, and each might contribute anywhere from $10k to $1 million. Although you’ll need more than just a good idea to get them onside, angel investors are known for taking risks in businesses and founders they believe in. Their knowledge, networks and cash can be invaluable when it comes to growing your business quickly.
Why it's important
Angel investors are a crucial part of the funding ecosystem because they plug a gap where venture capitalists usually won’t bother. Ultimately, they give businesses a cash injection to grow quicker than they’d be able to otherwise. For example, you might have proof that people are interested in your product, but need cash to sort out your manufacturing infrastructure; or be operating in a fast-moving space and need to grow quickly to fend off competitors. If you have a valid concept, but need more money than you can find to make it work properly, knowing how to attract angel investors will come in very handy.
In the US, about 300,000 people have made an angel investment over the past two years. There’s as much skill in the search as there is in winning over interested angels – you need to start early and get it right. If you don’t, you’ll waste valuable time without generating appropriate interest, or end up giving away part of your business to the wrong people. Your chosen angels will have sizeable sway over the decisions you make, so it’s important to pick people whose values align with yours and who have the relevant experience, know-how and contacts – as well as deep pockets.
Things to note
Make sure angel investment suits your long-term plans. It sounds obvious but you need to make absolutely sure angel investment is right for you and your business before you start searching for investors. Maybe you want to maintain full financial and decision-making control over your business; maybe you don’t need that much money to really take off; or you need significantly more than angels can offer. Growing quickly, generating hefty returns and eventually selling your business isn’t a desirable path for everyone. Plenty of household names – including Mailchimp and Shutterstock – raised little to no external funds and still succeeded.
It’s about more than money. You’ll only benefit from the angel-founder relationship if you’re selective in your search. Take advantage of the fact that most angels will want to play an active role – their knowledge, experience and contacts will be vital. That means thinking about what areas of your business you need assistance with: from establishing a supply chain or launching in new locations, to expanding your product range and hiring new talent. Alternatively, look for people with general business growth know-how – who have worked successfully with companies like yours in the past.
Angel investors come in different shapes and sizes. Some angels are easier to find than others. Many choose to play it low key, keeping the investments they make anonymous so they don’t get swamped with funding requests. Some go it alone; others in packs. Syndicates are groups of angel investors who have clubbed together with the intention of investing in a particular geographic area or industry. These networks can invest more and offer a range of expertise, but engaging with them is a much more bureaucratic process than with individuals.
Don’t outsource the search. Fundraising is time-consuming and difficult but, as the business owner, you’re the most qualified person to do it. Angel investors are often just as interested in you and your team as they are in the viability of your business idea; they generally won’t respond well to someone reaching out on your behalf.
How to find the right angel investors for your business
1. Work out what you need. You’re seeking angel investment because you’ve come up against barriers. Define the nature of those barriers – whether they’re purely financial or also about a lack of network and expertise – and how an angel investor would help you solve them. It can take around six months (sometimes a lot more) to go through the process, so you need to be thinking ahead.
2. Get everything in order. Make sure your business looks as appealing as it can to an outsider. Get clear on the details, like proof of demand and market dynamics or trends. You’ll likely need to show how your business’ revenue will grow over the next few years, and when you plan to sell so that any investors can see a path to returns. Later in the process, you’re going to need to tell the story of your business through a pitch deck (our guide is right here). Ask yourself: would you invest in your business right now? If the raw materials are already looking unconvincing, delay the search until you feel more confident in your business.
3. Work out what you can offer in return. Work out your business’ valuation. It might be that there are similar businesses in your space that can offer a comparison point, but you’ll need to work with accounting and legal professionals throughout the investment process – so enlist their help now. You’ll need to come to some big decisions: namely how much of your business you’re happy to give up and how much money you’ll need when settling on your valuation. If you’re only interested in working with a small number of angels, but you need a fair bit of cash, you’ll know to look for people with a history of making larger investments.
4. Network through people you know. Start identifying angels. It’s always helpful to start with people you know – angel investors are often swamped with requests, and respond better to warm intros than cold emails. Even if you’ve already raised money from family and friends, there might be some high-net-worth individuals in that mix that are willing and able to give you angel-level sums. Have other businesses like yours raised angel investment? Explore all your personal avenues: from previous jobs to incubator schemes.
5. Go to networking events. Hit up local business-related talks, events and meet-ups to get to know prospective angels and fellow business owners in the same boat. Business- and tech-focused media outlets, such as UK Tech News and Wired, host and list useful events, and you’ll also find that local co-working spaces regularly put events on. Sites like Eventbrite and LinkedIn are also handy places to search, as are specialised angel sites like the Angel Capital Association (ACA, for the US) and UK Business Angels Association (UKBAA, for the UK).
6. Head online. If you’re searching for an angel based on specific criteria rather than personal connections, go online. There are comprehensive lists of angel syndicates on Crunchbase, and via the directories of the UKBAA and the ACA. Filter through the portfolios of these networks, and of individual angels, to see if they’ve been involved in similar businesses. Go deep on LinkedIn, reaching out to experts or notable figures in your sector, whether they’re self-described angel investors or not. If your business is an attractive proposition, they might be able to introduce you to connections – or simply offer valuable feedback.
7. Do some due diligence. Hopefully your search will have yielded some promising candidates. Now’s the time to do a comprehensive background check on your shortlist. Try to speak to other business owners they’ve previously invested in. Pay close attention to previous investment successes or failures. If you end up going down the syndicate route, find out what you can about each member. Make sure that when you reach out, you know enough about them that you can tailor your message and give yourself the best chance of taking that conversation further.
• The right angel investor can be a huge benefit for a business and it’s about more than just money – their time, knowledge and industry experience can be just as valuable.
• Angels get approached by a lot of business owners, so your proposition needs to be in excellent shape – and stand out from the crowd – before you begin your search.
• When it comes to finding angel investors, your network, personal connections and reputation are often your best assets. Use them!
Perspective. Investor Pietro Invernizzi outlines seven things that helped startups he’s worked with find angels via LinkedIn. These range from ‘the porcini effect’ (where, as with mushrooms, it’s likely you’ll stumble across angels in clusters) to the art of avoiding scammers.
Tool. Francesca Warner is a partner at Ada Ventures and has put together a brilliant list of ‘questions to ask angels before taking their £££’.