Angel investors typically invest in businesses that are in the early stages of development, such as seed funding or series A funding rounds. They are often looking for businesses with innovative ideas, strong management teams, and a large addressable market. Angel investors may also be interested in investing in businesses that are aligned with their own personal values or interests.

When angel investors invest in a business, they typically receive ownership equity in the company. This means that they share in the profits and losses of the business. Angel investors may also be involved in the management of the company, providing mentorship and advice to the founders.

Angel investing can be a rewarding experience for both the investor and the entrepreneur. Investors can achieve high returns on their investment if the business is successful. Entrepreneurs can benefit from the capital, expertise, and network of contacts that angel investors can provide.

Who Angel Investment Funding Is Right For?

Angel investment funding isn’t right for every startup business. It’s important to consider what taking on an investor will mean for your business. Three things should be true of your business if you’re considering angel investing:

Startups comfortable taking on a business partner: Not only does an angel investor provide funding to your business, but as they become a business partner, they bring their own opinions on how you should do business.

Businesses with the potential to scale quickly: Most angel investors receive at least a 6x return on their investment. Your business must grow rapidly to provide this type of return on investment.

Businesses with an innovative product or concept: Because you’re competing against so many startup businesses, you need something that makes your product, service, or business stand out with investors.

How To Get Funding From Angel Investors

As already mentioned, angel investors receive an equity stake in your company or a convertible note and typically contribute funds to startups based on their interests. Follow the five steps below to secure funding.

Step 1: Network to Find Angel Investors

Your current business and personal connections often might be potential angel investors, and they may even be able to introduce you to potential investors. Some ways to find angel investors include:

  • Getting feedback on your product or service from experts: Not only can experts help you with advice for your growing business, but they might be angel investors willing to help financially. They can also help you network with other potential angel investors.
  • Checking with friends, family, and your business network: Apart from looking for investors on websites such as LinkedIn and AngelList, ask your friends and family who might be interested in becoming angel investors. Also, check with fellow business owners on angel investors who have helped their businesses.
  • Asking professionals who work with other startups: Your attorney or accountant might work with startups that have used angel investing, so ask them if they can help network with potential investors.
  • Participate in competitions or startup incubators: A business plan competition, a startup competition, or a startup incubator are great ways to expose your business to potential investors.

What to Look for In An Angel Investor

  1. Individuals looking to invest: You have to find people interested in investing personal funds into your business.
  2. Target industry: You’re looking for someone interested in your product or service.
  3. Geographic location: If you can meet with an investor face-to-face, it could increase their chances of investing.

Directories Listing Angel Investors

Here are some directories that can be a good starting point when looking for an angel investor:

  1. AngelList: Matches startups with angel investors.
  2. FundersClub: Has more than 28,000 members looking to invest in startups.
  3. Gust: Network of vetted experts looking to invest in startups.
  4. Angel Capital Association: Lists angel groups by region and accredited investment platforms.

Here are some of the benefits of angel investing for entrepreneurs:

  • Access to capital: Angel investors can provide startups with the capital they need to grow and develop their businesses.
  • Expertise and mentorship: Angel investors often have experience in the industries in which they invest. They can provide entrepreneurs with valuable mentorship and advice on how to grow their businesses.
  • Network of contacts: Angel investors often have a wide network of contacts that they can introduce entrepreneurs to. This can help entrepreneurs to raise additional capital, find new customers, and build partnerships.

Step 2: Prepare & Present Your Pitch Deck

While an elevator pitch might get your foot in the door, a pitch deck is what you hope will seal the deal with a potential investor. Your pitch deck should cover most, if not all, of the following points:

  • What problem does your product or service solve?
  • How is your product or service the solution, and how is the timing right for your product?
  • What the market looks like with current conditions and future growth
  • What your product is and testimonials on its value
  • How your product or service is performing and how it’ll continue to grow
  • Who is on your team?
  • Who or what is your competition, and what sets your product apart?
  • Three years’ worth of financial projections (ideally)
  • Amount of funds needed

Step 3: Discuss Terms

Once you have presented your pitch, the angel investor will let you know if they’re interested in your business. If there’s a mutual interest, the two parties will begin discussing the terms of the investment. Those terms will include:

  • The amount of investor’s equity stake
  • The investor’s involvement in the business
  • How the funding will be structured

Step 4: Agree on Funding Structure

A convertible note is the most common form of financial agreement used in angel investing. The investor agrees to loan you money that provides for interest payments, then converts to equity ownership when a company reaches a specific valuation. Other parts of the convertible note include:

  • Collateral: Most angel funding is unsecured, but it might require corporate or personal assets to be used to guarantee repayment.
  • Discount: The equity is usually converted when a later round of funding occurs, often with venture capitalists. Angel investors are rewarded for taking the early risk in the business by converting their loan into equity at a discount compared to the valuation in the professional investment round. This discount is usually 20%.
  • Valuation cap: Angel investors like to have a maximum valuation when their loan converts to equity due to the unknown valuation of later rounds of funding. Suppose a venture capital firm invests at a valuation of $50 million. In that case, a valuation cap of $10 million in the convertible note means the angel investor would convert into equity at that cap figure of $10 million. This protects angel investors from ownership being too small due to high valuations in later fundraising rounds.

Step 5: Court Multiple Investors

Just as you would shop around if you were looking for a small business loan, you should do the same when searching for angel investors. Even if you think you have an angel investor locked down, it’s a good idea to have other options in case an investor pulls out of a deal.

Alternatives to Angel Funding

Getting angel funding can be difficult—and just finding an angel investor can be a challenge. If angel investing doesn’t work out for your startup, there are other great options for startup funding. Alternatives to angel funding include:

It is important to note that angel investing is also a high-risk investment. Many startups fail, so investors may lose all or part of their investment. Additionally, angel investments are typically illiquid, meaning that it can be difficult to sell your ownership stake in a startup.

If you are an entrepreneur considering seeking angel investment, it is important to carefully research potential investors and choose those who are a good fit for your business. You should also be prepared to give up some ownership and control of your company in exchange for angel investment.

Note: you can focus on only Angel investors or a combination of Angel investors and Venture Capitalist but typically Angel investors are those that invest in pre-seed, Seed or just Angel investment opportunities.

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