Winning an Angel Investor is the dream of every startup founder who is looking to secure funding for their Startups. In this article we’ll go over the need-to-knows about Angel Investors, and how you can prepare to pitch to investors. We’ll point out some noteworthy early stage challenges, opportunities and risks. This article will help you to understand the process that will help when growing your business. https://en.wikipedia.org/wiki/Angel_investor
How to win an Angel Investor?
When you are starting a company and getting going, you should put not just your entrepreneur’s hat on but put yourself in the shoes of a potential investor. Understand early on what an investor is likely to focus on for evaluating your early-stage business. After all, you are in the business of selling risk and the investor is buying risk, in exchange for a return on their investment.
Therefore you as a founder have to consider these 4 crucial issues which any potential investor is going to assess.
1. Are you solving a meaningful problem or satisfying a meaningful need?
Perhaps the biggest pitfall for entrepreneurs is that they do not sufficiently demonstrate that they are solving a market need. So, you as an entrepreneur must think creatively about how to demonstrate this; how to provide that evidence.
2. Are you on the moving train?
Angel Investors love momentum stories. Stories that are trendy and the market interest is high. Investors love the story that you are using emerging technology to solve the market need. Your business must be tapping into an emerging technology, a new consumer or business trend, or changing demographics to attract the interest of Angel Investors.
3. Do you have the ability to grow the business?
Founders need to demonstrate that they understand very well the business model and what is required to build it. You demonstrate that you have a unique way to efficiently market to consumers.
4. What is the cost of growing the business?
Entrepreneurs need to assess the profit margin and operation cost for the business – both at the venture’s start and at scale. Margins and timing of revenue (when cash comes in) are crucial. These will dictate much of the financing requirements for the venture. Investors want to know if you are going to need $5M to get to break-even or $50M. In addition to any capital expenditures, your financing strategy is greatly influenced by the venture’s unit economics. Many businesses make assumptions that turn out not to be true. So, investors want to understand how well you have vetted your assumptions.
What is an Angel Investor?
Angel investors are wealthy private investors focused on financing small business ventures in exchange for equity. An angel investor provides initial seed money for startup businesses. They fund businesses in many industries.
Unlike a venture capital firm that uses an investment fund, angels use their own net worth. The angel investor may be involved in a series of projects on a purely professional basis or may be found among an entrepreneur’s family and friends. The investor’s involvement may be a one-time infusion of seed money or an ongoing injection of cash to get a product to market. As such, they are usually considered to be higher risk/higher return investors than traditional investors.
Angel investors aren’t usually in the loan business. They’re putting money into an idea they like, with the expectation of a reward only if and when the business takes off. However, angel investors are often credited with playing a critical role in the development of many successful businesses.
History about Angel Investors
In fact, historically, angel investing opportunities were only available to accredited investors. Accredited investors are those with an annual income of $200,000 or a net worth of at least $1 million, excluding a primary residence. Companies that raise money from accredited investors are not subject to many of the securities filings. Therefore, most equity fundraisers look for capital from these accredited investors. Many experts believe that angel investors must be accredited.
However, Title III and Title IV of the JOBS Act changed that somewhat, giving access to investors under Regulation A+ and Regulation CF+. Investors who don’t meet the criteria to be accredited can now invest under A+ and CF+, giving angel investors new opportunities and definitions in capital markets.
For a full portfolio of as many as 20 companies, an angel investor must be comfortable with investing from $200,000 to $500,000. This is not the type of investing you do with your entire nest egg. Most angels aim to put 10 to 20 percent of their investable assets into these projects. Mr Clark, a Venture Capital Broker, states, “If you take a look at the numbers, I think you’ll find the average angel investor has somewhere north of $5 million and south of $100 million in assets.”
Understanding Angel Investors
Most angel investors are relatively looking for a higher rate of return than can be found in more traditional investment opportunities. They search for startups with intriguing ideas and invest their own money to help develop them further. The percentage of ownership that angel investors typically take in a company can vary, but typically it is between 10-20%. Angels can invest $5,000 to $500, 000 per startup. In return, they receive an equity stake in the company. That averages around 20% but can rise to as much as 50% of a young company. Angels consider lots of early-stage startups in the beginning. Then they narrow down their investment choices to a few. Then, they provide funding to their chosen startups to cover costs until the business starts growing.
Investors and entrepreneurs are open to negotiate funding and equity details directly, especially in the earliest ventures. Investors also may use the company’s valuation to determine how much ownership to take. For example, if an angel invests $500,000 in a startup with a $2 million valuation, the company’s value jumps to $2.5 million and the angel’s equity stake in the company is 20%.
Conditions and requirements of Angel Investors in a startup
An angel investor may impose several requirements on their investment, such as a seat on the board of directors, active involvement in the company, or a minimum return on their investment. An angel investor may require a seat on the board of directors so that they can provide input and advice on the direction of the company.
There are several common conditions that angel investors look for in their investments. Some of these conditions focus on characteristics of the deal itself, such as how much equity in the company the investor will receive, while other conditions are more centered on particular characteristics of the company. Some common conditions and characteristics that attract investors include companies having a simple and complete business plan, having a passionate founder or business owner, small capital requirements, and an innovative idea or distinct company culture.
How Angel Investors Benefit
Angel investors may benefit from their investment in a company in several ways, including through the sale of the company, the return on investment through interest on their investment, dividends, the appreciation of the company’s stock if it goes public with an initial public offering (IPO), and through angel investor-focused tax breaks. Angel investors typically gain their largest profits when the company they invest in is sold to another company or goes public through an IPO.
For example if an angel investor owns 10% of a company that is sold for $1 million, the angel investor would receive $100,000. If the company goes public and the stock is trading at $10 per share, and the angel investor still owns 10%, then the value of their stake would be $1 million, a value that would fluctuate depending on the stock price. Angel investors have been known to ask for and obtain equity stakes as high as 20% to 50% in the companies they invest in depending on the size of their investment and the stage of the business.
Why Look for an Angel?
An entrepreneur may seek an angel investor over more conventional financing. The terms tend to be more favorable and, in fact, the angel investor doesn’t expect to get the money back unless the idea succeeds. They often seek an equity stake and a seat on the board.
Business success requires savvy planning, creative thinking, and, of course, considerable financing. Entrepreneurs looking to get their next big idea off the ground might find success from any number of investment opportunities. And, for some young businesses, an angel investor may be the best route to financial stability and success. https://christopheclark.com/
Benefits of working with Angel Investors
Some of the benefits of working with an angel investor include their accessibility and personal connection to the project. They may also provide valuable mentorship and advice, as well as introductions to their networks.
Angels are patient with entrepreneurs and are open to providing smaller dollar amounts for a longer time period. But they do want to see an exit strategy at some point where they can pocket their profits, typically through a public offering or an acquisition.
Do I need an angel investor?”
The answer to the question is Maybe. The question is always asked by founders or entrepreneurs looking to start a business. The answer will depend on several factors such as financial goals and investment expectations. If your young business has yet to launch, and you require funding to continue your operations, an angel investor may be the ideal solution. Angel investors are interested in an idea more than a finished product, willing to take a financial risk without necessitating proof of concept.
As you are aware in most cases, businesses often need a cash influx long before any viable product is produced, and this early funding is essential to provide resources needed to grow the business.