You've got a great idea, a solid business plan, and a diverse team. The only thing left to do is find a source of starting capital. But how can you tackle this challenge the best possible way?
Raising money is done through different methods. Some are harder but more rewarding. Others are modern but somewhat confusing.
In this article, we will help you understand how to approach angel investors effectively. By implementing the advice found in the following chapters, your chances of raising capital and building lasting relationships will increase dramatically.
How to approach angel investors - Top 5 tips
According to Harvard University, startups that receive funding from angel investors are more likely to survive and grow. Therefore, whenever you meet potential funding partners, you need to leave a lasting impression. Here are five helpful tips to help you prepare accordingly:
1. Be prepared when approaching angel investors
The best way to approach angel investors is to research their background first. This will help you tailor a more relatable presentation.
Once you find an investor you'd like to work with - a process further analyzed in the following chapters - take the following actions:
- Find them on LinkedIn and explore their background.
- Check their work and investing experience; see if it could benefit your project.
- Understand their management style. Are they active participants or passive investors? You can do this by connecting with other founders they have worked with.
2. Understand the importance of your product
Make sure you understand the problem that your product is trying to solve. This entails:
- Defining your target market - What type of costumers are you looking to attract, what is the market size, who is your competition, etc.
Answers to these questions will also help you validate your business idea.
- Clearly outline the problem - Make sure that the problem is real, and indicate how your startup will provide a solution.
- Define your product's unique selling proposition (USPs).
- Briefly discuss your action plan - Create a roadmap and explain how you intend to reach your short and long-term goals.
3. Keep it simple
While numbers are important, make sure you don't go overboard. Excessive data can make your pitch too dry and even overwhelming.
- When preparing your presentation, ask yourself this: "Would a 10-year old child understand my business proposition?" Ideally, you'd want to keep things as short and simple as possible.
- Try to relate by giving a personal, real-life example of the problem.
- Focus on facts and avoid going too deep into quantitative data or personal opinions.
- Start your pitch with questions that lead to a "yes", This is a common persuasion method and is more commonly known as the "Yes" ladder.
4. Have a great team dynamic
Angel investors tend to look at the balance of your team. The skillset of your co-founders should cover all the important aspects of your early-stage company. We have previously discussed the key roles of a startup.
You can briefly elaborate on your team's professional background to prove how they are a good fit. You could also bring a technical co-founder to the pitch, in case a potential investor wants to get a better understanding of the technical aspects of the product.
5. Provide an exit strategy
Projections are mainly assumptions. However, it may be good to briefly touch upon this point, since potential investors want to know what is in it for them.
By providing an exit strategy, along with a detailed risk analysis, you help them better understand what they are signing up for. Angel investors may be passionate about your product, but the main goal is to increase their wealth.
Angel investors directory - Where to find investors
Wondering how to reach out to angel investors? Look no further than angel investor directories. These websites help founders discover and connect with potential funding partners. They usually categorize investors by their expertise or location. Here are some platforms that will help you find a match:
- Angel Capital Association (ACA) - The directory of ACA is one of the largest in the world. Boasting more than 13.000 accredited angel investors, the platform is an excellent resource for founders seeking to raise capital throughout the U.S. and Canada.
- Gust (formerly known as Angelsoft) - The platform is known as the largest startup network in the world. With an excess of $1 billion in capital investments, Gust connects you with hundreds of angel investors through a single application.
- Carrefour Capital Connexion - CCC is a database network that helps founders and investors connect. Signing up on the platform is free for both parties.
- Canadian Investment Network - CIN connects Canadian startups with angel investors. Creating a proposal is free of charge, but if a match is made, the company needs to pay a fee to the network.
- The BC Angel Forum - Startups seeking equity financing of $100.000 to $1 million are able to use this platform to give "live" presentations to qualified investors.
Note that the options above do not lead to certain funding; instead, they act as a middleman that connects the interested parties.
Now that you know where to find angel investors, it's time to delve into the actual funding process.
Angel round investment explained
Startups raise capital through a series of investments. Each of these rounds is known as a funding round. They are used to raise capital for the next milestone of your company's growth.
Naturally, you will need to know how to approach an angel investor for funding. This happen in the very first investment round; the angel round. During this stage, new companies are trying to raise a relatively small amount of money that will help an idea turn into a concrete project.
Participants in this round include individual angel investors, groups of angel investors, as well as friends and family of the founders.
Angel rounds are also known to be very rewarding for early investors. New projects will usually give away a disproportionate amount of their company's equity in exchange for amounts lower than $100,000.
How do you pay back angel investors?
When trying to understand how to approach angel investors, it's important to remember that they only make money when a project:
- Is sold to another business entity (most likely)
- Has an IPO (less likely and more rewarding)
Both options are more likely to occur when angel investors are actively involved in the ventures they have invested in. This can be either as a mentor or by getting inducted to the Board.
How much equity should an angel investor get?
Generally speaking, startups should be ready to offer 20% to 40% during an angel round. However, equity numbers can vary massively, and it would be wrong to use this range as a rule of thumb.
Equity numbers vary depending on the project's needs and the investor's capital. Initially, founders should have a good idea of their company's valuation as well as the capital they are looking to raise.At this early stage, calculating a project's valuation is a difficult task, especially when the company is not yet producing monthly recurring revenue (MRR).
To make this process a little easier, ask yourself what percentage of equity you'd be willing to part with:
What is the lowest amount of equity that I am willing to part with, in order to receive the minimum capital required to reach the company's targets?
Especially at an early stage, equity is not just a great way to raise funds, but also a strong motivation for co-founders and initial employees.
You should now better understand how to approach angel investors. To sum up the key points of this post, here is what you need to keep in mind:
- A simple and well-developed business idea, combined with a memorable pitch is a great way to capture the attention of angel investors.
- Before seeking capital for your business, decide on the amount of equity you are ready to part with and the amount you need to raise.
- Use online directories to discover and connect with angel investors.
Frequently asked questions (FAQs)
If you still have questions on how to approach angel investors, check the frequently asked questions below.
How do you ask early stage advice from angel investors?
Each Angel investor is a unique individual; with different goals, investment themes, and objectives. In order to get the most from them, try to keep your pitch simple, clear, and concise, while adding elements of personalization. Once you establish a connection, you can proceed to a more casual conversation where you will be able to ask for advice.
How do you ask an investor for funding?
The tips in this article should give you a good idea of the steps you need to follow. On the other hand, if you are looking for a more personal approach, consider the following:
- Reach out through LinkedIn, Twitter, or other platforms where your prospect is active
- You can also try the cold email approach. Once (and if) they reply, you can pitch your idea.
How do you say no to an investor?
Not all investors fit the profile you are looking for. When saying no to an investor, politely decline the offer and make sure you explain the reason behind your decision. Doing so will give you the opportunity to reach out to them at a later point in time.
How do you impress a potential investor during your pitch?
- Be honest and open - you need to build trust.
- Keep answers short and direct.
- Make sure you know who you are pitching to.
- Add elements of surprise and real-life examples.
- Don't interrupt the investors and listen to their advice.
- Practice your pitch beforehand.
Finally, have a look at the following video, which points out some of the most common blunders that get startups rejected:
What are some interesting questions to ask angel investors?
When figuring out how to approach investors, one of the hardest things to do is make the first conversation valuable for both parties. You don’t want to come over as needy or pushy; you also don’t want to sound desperate. Ideally, you’d want to come over as a confident founder that chooses a “lucky” investors, rather than indicating the opposite.
This is why you may want to strategically play out all the different scenarios that could come into play. Here are some good conversation starters that are not really startup-related, but ould help you get a better idea of the type of person you’re dealing with:
- What new industry are you most excited about in the next five years? Why?
- What is the most unusual investment you ever made and how did you find out about it?
- Is investing a job or a hobby? What makes it a job if this is the case?
- Is there any interesting paradox you come across repeatedly when talking with founders?
When raising money from angel investors, how do I decide which investor to go with?
After you know how to approach angel investors and manage to pitch your idea, you will most likely receive offers. Here are some criteria you should consider before picking your partner:
- Is the equity you are expected to hand over worth the money that the investor is willing to offer?
- Is the investor well-versed in the industry you are operating in? If so, are there any other companies in the investor’s portfolio that you could refer to when it comes to the investor’s involvement?
- Is the investor willing to actively participate in the growth process of the product and help you make the right introductions in the industry, to ensure future success?
The answer to these questions will point you in the right direction and help you create a better long-term outlook for the partnership you’re about to undertake.
Are angel investors a good idea for non-tech startups?
Yes, angel investors support businesses in all sorts of industries. The best way to find investors that are non-tech oriented is to check out this list from Angel.co. In it, you will find more than 550 active Aangels that are investing in a broad range of sectors. Apart from that, you can explore different social media platforms that list the types of companies they have previously invested in. A great way to do this is through LinkedIn angel investors.
What is the best way to find Angel investors (but not yet common practice)?
As mentioned earlier, one of the less common ways is to reach out via social media platforms like Linkedin. Apart from that, you could put your creativity to work and try out all different methods that may lead to success:
- Send out cold emails.
- Go to places where they might go (restaurants, clubs, cafes).
- Get to know people that are close to them and ask for an introduction.
- Visit startup events and be in the break room after the pitching sessions.
- Furthermore, make sure you follow all the tips listed in this article.
What percentage do angel investors want when it comes to equity share?
After reading our article you should know how to find angel investors and that the funding round they come in is the earliest possible - the angel round. Due to this early stage, investors will usually be able to offer less funds to receive a larger amount of equity. Generally speaking, Angel investors will want to receive anywhere from 15% to 25% of equity for the amount they choose to offer. There are many smaller details that you would need to look into when it comes to this process before drawing up any contracts, so we may soon write a separate article to give a better overview.