So, your business needs some seed or startup capital to get going and you and your co-founders can’t fund it yourselves. Often, the next step is to start searching for “angel investors” who are commonly known as investors that invest in very early stage/seed stage businesses. So, how do you find them and what should you expect from them?
Know Your Target
You might be cash-strapped and willing to accept funds from pretty much any source, but it is more than worthwhile to find the angel investor right for your situation. Angel investors come in a multitude of varieties and it’s important for founders to know what they are looking for. Are you looking for just money? Or are you looking for “smart-money” (i.e., someone who can both invest, advise, and potentially open industry or investment doors for you)?
Typically, these investors should be “accredited investors.” Learn more about that designation here. You need to make sure that the offering exemption under which you are selling securities provides for the types of investors that you are pitching. Be sure to coordinate with your securities lawyer.
Here are a few different types of angel investors that you may come across, along with pros and cons:
This type of investor engages in angel investing as his or her primary occupation and will have an investing portfolio that is very diversified. With this type of angel investor, you will have access to a wealth of industry knowledge and funding sources. However, just because you have access does not always mean this network will be at your fingertips; super angel investors often have many irons in the fire and may not be equipped to give your startup their undivided attention.
These angel investors have years of experience in your startup’s specific market vertical. They will have the foresight to discern how your startup fits into the market and will be able to give you important advice. Domain investors will also be enthusiastic about offering expertise and advice – even when you are not seeking it.
You might come to these investors before anyone else. Because you are personally close to these investors, they will often be your most enthusiastic cheerleaders. However, the added value that stems from these investors may be fairly limited.
For purposes of focusing on a particular industry or geographic region, angel investors will often arrange themselves into groups. As an entrepreneur, this can be beneficial because one presentation or pitch can be viewed by multiple potential investors. Some angel investor groups are known for the significant amount of time and scrutiny they require before investing in a startup and generic investment terms that do not translate into specific industries.
Raising Money is Difficult and Success is Often a Function of Your Network
Raising money isn’t just about having a good idea- it’s about having a good idea, having a good team that can execute that idea, and, typically, having access to capital. In my experience, the clients who have raised money successfully had all of the above (especially the network of the right people).
Don’t get discouraged if you don’t have the network of the right people. That just means you need to build a network that includes the right people. So, connecting with angels (or people that can connect you to angels) is critical.
Perhaps the most valuable piece of advice at this stage is to not get discouraged. You will likely not run out of potential angel investors to pitch. If you have introduced yourself, either online or at a professional networking event, the angel investor will want to know much more information and details about your startup. Depending on the amount of communication you have had at this stage, you will give your elevator pitch, send an executive summary of your business, or find a time to give the full pitch.
Giving the Pitch
Pitching your company’s idea to an angel investor is different from pitching to a venture capitalist in a few ways. One of those ways is that because angel investors represent themselves and their money, you will want to come across as personally likeable. The pitch meeting’s purpose is not necessarily to close a deal, but to plant the seeds of a professional relationship that will likely eventually lead to closing.
Before They Invest, Make Sure That Expectations Are Clearly Set
Early stage investing is the riskiest type of investments that one can make. Make sure that your investors have appropriate expectations. They should be prepared to lose the entire amount of their investment. They should also have the expectation that, even if successful, this money will be “locked up” (and not refunded to them) for an indefinite and long period of time. If they don’t have those expectations, I can assure that there will be problems after they have invested. They will more likely be the investors calling the founder and bugging them about the business plan, when the company will be making a profit and distributing money to them, or otherwise expressing dissatisfaction and remorse (or worse, threatening legal actions).
If losing this investment would be a financial catastrophe (or even moderately stressful) for the investor, I’d tell you to reconsider taking their money. It’s a recipe for disaster if the investor can’t really afford to lose the money.
After the Deal is Closed
While in many cases it won’t be required to provide periodic updates to investors, doing so can help with investor relations. You never know when you might want to or need to go back to them for additional investments. Make sure that you are providing the appropriate amount of communication and updates to your investors. Many clients choose to provide quarterly or semi-annual updates about the status of the business.
Doida Law Group works with entrepreneurs to help them set a clear business plan and pathway with the right legal protections to achieve their dreams. With our innovative fixed-fees approach, clients are able to compensate based on ultimate value reached and not simply billable hours. This results in an optimal business relationship between you and us. Reach out to us today so we can figure out a solution for your business and be your long-term partners.