Starting your own business can be a huge step. And while entrepreneurship is exciting and often worth the work in the end, it's not always easy. Luckily, in the financial world, people and businesses are always looking to invest in new companies.
Angel investors are often looking for worthwhile risks to take with their money. So, with the right idea and a good amount of business sense, you could catch the eye of someone willing to invest. But angel investors aren't as charitable as their moniker indicates. Instead, they are businessmen and women who want something from you, too. Find out what it takes to start a business with angel investors.
What Are Angel Investors?
Angel investors are people with high net worth who are looking to grow their wealth by investing in new business ideas. They are sometimes called private investors, seed investors or angel funders.
Angel investors don’t offer grants or fund you out of the goodness of their hearts, however. Instead, they're interested in business ideas they believe have real merit — and a real chance of succeeding in the marketplace.
Angel investors can provide a one-time investment to help a startup get launched, or they can be involved in ongoing investment to help support a startup get through several early phases of development. Of course, not every business that angel investors fund will succeed, which means these investors are looking for a significant return when companies do hit it big.
For example, some investors want as much as 10 times the return on the initial investment, so this isn't necessarily a cheap way of funding your startup. However, angel investors can have a lot to offer, so it’s worth understanding how angel investing works and how to find these type of opportunities.
How Does Angel Investing Work for Startups?
Although angel investors sometimes provide the seed money for a startup, typically, they come in as a secondary investor to help you grow an existing, fairly new company. Still, angel investors tend to offer more favorable terms than traditional lenders because they usually and deliberately invest in the potential of the entrepreneur and the startup, not necessarily the viability of the business.
Angel investors are willing to invest in higher-risk ideas because the money they use to invest is usually excess capital they have on hand or available. They’re also willing to take on more risk because the expected return is increased as well.
Angel investors are sometimes called seed investors for good reason. Seed money is the funds you use to plant the seeds of your business — the money used to pay for things like a business license, prototypes or business planning.
Commonly, seed money comes from your own pocket, gifts or loans from family and friends or even a credit card (see 'Which Credit Cards Build Business Credit?'). If you're lucky enough to connect with an angel investor this early in your business startup — and the investor buys into your idea — he may also contribute seed money.
More commonly, angel investors fund the next wave of capital for your business, providing, on average, $25,000 to $50,000. In some cases, angel investors might fund much less or much more. When you get into hundreds of thousands in funding, however, you're getting away from angel investing and into venture capitalism territory.
You'll work out the terms of investment with each individual angel investor. Options might include a percentage of profits in the company up to a certain amount — or payments set to be made based on the business making it to certain success milestones.
Angel investment isn't always formal, and you can connect with these individuals in a variety of ways. An angel investor may be someone in your professional network who believes in your business idea and wants to put their money to work. You can also find potential angel investors online. Here are some notable angel investor sites to connect companies and potential investors:
How Your Business Can Qualify for Angel Investment
The requirements for funding depend on each investor. Unlike bank loans, angel investment rarely depends heavily on personal or business credit histories (see also 'How To Get Business Credit'). Instead, angel investors are looking for great business concepts fronted by people with the right skill sets to succeed. To land funding from one of these investors, you'll need:
A great business idea
A solid business plan
A winning pitch and pitch deck
A little bit of luck
A lot of persistence
An important point to bear in mind about angel investors is that they’re generally not in it for the long term. Since so many startups fail, the angel investors who seed them stand to lose their entire investment.
As a result, angel investors tend to look for startup opportunities who have worked out a legitimate exit strategy for the investors — or a plan for acquisition or initial public offering. If you have these details worked out for your startup, it gives your business added value in the eyes of potential angel investors.
What Are the Benefits of Funding From Angel Investors?
Angel investing is a tried-and-true method for gaining capital for your business. Companies like Apple and Starbucks started with angel investors, and the arrangement can be a huge win for everyone involved.
What’s more, a big advantage is that funding through angel investors is less risky than debt financing. Unlike a traditional business loan, capital invested by angel investors does not have to be paid back in the event of the startup’s failure. Instead, it’s a risk angel investors knowingly take on.
Some angel investors are experienced entrepreneurs, and they may even be willing to offer advice or other resources to help ensure your business is successful. Because the terms are between you and the investor, you can also develop a financial plan that works well with your business plan, which isn't always the case with traditional loans.
What Are the Disadvantages of Funding From Angel Investors?
Perhaps the biggest disadvantage of funding from angel investors is the difficulty of obtaining it. If you don't have the right presentation skills or the ability to articulate your concept in a way that resonates with investors, you're unlikely to receive the startup funding you want.
Plus, angel investors put a lot on the line, financially speaking, for the companies they fund. So, angel investors aren't simply going to write a check without keeping tabs on your progress. Angel investors do a lot of due diligence, and you may have to answer numerous questions, attend several meetings and make more than one presentation before you get an answer about funding.
Another principal disadvantage of using angel investors is that you might lose complete control as an owner. Since they’re providing much-needed funds for an unproven startup idea, they may negotiate greater involvement and control for themselves.
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The Bottom Line
Angel investors tend to gravitate toward certain types of startup concepts. Tech startups have always been a beacon for this type of funding. However, any innovative or unique concept could catch investor interest and help you get startup business financing. Even a more mainstream business concept can attract angel investors if you can make a case for a high potential for return.
Angel investing certainly isn't for everyone, and it's not generally worth the effort if you only need a few thousand dollars to launch your startup. Generally, you'll want to wait until you need $25,000 or more in funding that can't be achieved through easier means before you start working to attract this type of investor.