If venture capital and crowdfunding aren’t quite the right fit for you, maybe angel investing is. A lot of entrepreneurs fall into the trick of believing that they need money, not guidance. This is where angel funding offers the best of both worlds.
Angel investing is when an HNWI individual start-up investor, known as an angel investor, provides angel funding to early-stage start-ups. Typically, angel investors for startups invest their own money to fund the initial stages of operations.
Needless to say, the role of angel investors in providing angel financing is critical. Angel financing helps secure the seed funds needed which are otherwise difficult to get from venture capitalists. Apart from angel investors providing funding for small businesses, they also help gain access to the angel network where both, angels and entrepreneurs have access to a pool of resources. While all the advantages angel investors provide for small businesses, it’s important to keep in mind that angel investors for startups don’t provide as high an investment as a venture capital firm. This is especially limiting for a startup that needs massive amounts of funding early on. Angels and entrepreneurs may also have disagreements over the vision of the business which can cause a strain on the working relationship they have.
Characteristics of Angel Investors
Angel investors can either be individuals or part of an angel investment network found on angel investor websites that pool resources to provide angel financing.
They are motivated by the possibility of high returns on their investment, the satisfaction of mentoring and supporting entrepreneurs, and being part of disruptive technologies.
Angel investors look for pioneering and high-potential business models, a great team, and a defined path towards profitability. Like most other investors, they also consider the market size, the competition, and a probable exit strategy.
Finding Angel Investors
Some of the best ways to find angel investors are:
- Angel Investor Websites such as Wellfound (formerly known as AngelList)
- Angel investor networks and groups
- Crowdfunding platforms such as Seedrs
- Local startup and entrepreneur community events
- Pitching events
- Industry talks
Preparing a Pitch for Angel Investors
Use these pointers to get you off the ground:
- Expected returns
- Growth potential and scalability.
- Your Team
- Your Business Plan.
- An Exit strategy
- Find a Narrative – show how you make a difference in the world
- Show that you need their help and guidance, not just their capital
Building Relationships with Potential Angel Investors
This 5-step plan will not just make you connect better with your angel investors, but also build long-term market repo –
- Know them on a personal level.
- Send regular updates regarding your business.
- Be candid.
- Make them feel involved by asking them for advice.
- Be appreciative – send them thank you notes or small gifts of appreciation
Negotiating with Angel Investors
Understanding the Terms of an Angel Investment
The terms are decided and then put to writing through a term sheet. A term sheet is a document outlining the terms and conditions of a proposed business deal between two parties. It includes details such as the proposed price, amount and type of funding, the ownership structure, the rights and responsibilities of each party, and any special provisions or conditions. Some of the key terms and provisions you should know are mentioned below:
- Consideration: what each party will receive in exchange for their contribution to the agreement, such as cash, equity, or other assets.
- Payment terms: amount and timing of any payments to be made.
- Representations and Warranties: Each party’s representations and warranties are statements about the truthfulness and accuracy of information related to the agreement.
- Conditions precedent: The conditions such as regulatory approval or the completion of due diligence.
- Termination: The circumstances under which either party can terminate the agreement before the end of the term.
- Confidentiality: The confidentiality provisions, outline how confidential information will be protected.
- Dispute resolution: stating the process for resolving any disputes that could arise between parties.
- Indemnification: Stating which party will be responsible for any losses, damages, or liabilities that may occur
Negotiating a Fair Valuation for Your Startup
First of all, know your priorities and objectives and convey them to the other party clearly. Secondly, do your due diligence and be up-to-date about market standards and industry norms. During negotiation, be accommodating and respectful. Finally, be prepared to walk away from the deal if you feel like the terms aren’t to your liking.
Balancing the Interests of Angel Investors and Founders
Balancing the interests of angel investors and founders needs clear communication and alignment of goals right off the bat. Founders should be clear about their vision and growth plans, simultaneously bearing in mind the needs and expectations of angel investors. Establishing that both parties have an understanding of the potential risks and rewards of the deal is vital. Having an air-tight term sheet cannot be stated enough. Frequent updates, accountability, and trust are indispensable to maintaining a healthy and long-lasting relationship between angel investors and founders.
Risks and Rewards of Angel Investing
Limited funding: If a business requires additional funding to grow and scale, it may be needed to seek additional investment elsewhere.
Conflicting goals and interests with the entrepreneur: Angels are more involved in the day-to-day operations, leading to strains on the working relationship between founders and investors.
Lack the expertise and experience compared to VCs: Venture capital involves a lot of different roles and responsibilities being assigned by different individuals, making the process of research and due diligence more efficient as compared to a single angel. Note here that some angels have backend teams to work on certain tasks.
More flexible terms compared to VCs: Since VCs are looked at as ‘return-only’, they have the reputation of being somewhat strict on their term sheets. Angels can compromise if they really like the plan the founder has.
Valuable industry expertise and mentorship: This is one of the best parts of angel investing. They add many fringe benefits apart from funding. One can find a great employee, build brand awareness, and find investors all through the network that the angel has introduced the founder to. In addition to this, they also provide invaluable advice.
Small funding amounts can boost a business: Starting with small seed amounts can really work wonders with investors down the line, especially because they know how financially intelligent the founder is.
Managing Risks and Maximizing Returns
One needs to have clear objectives with an angel right from the start. This means clarifying goals, the plan to achieve them, how disputes would be resolved and a mutually agreed upon exit strategy. Simply doing this lessens the chances of heated arguments because everything has been clearly stated on the term sheet. Having an early conversation about how additional funds might be needed post this deal should also be considered so that the angel has time to finance the deal and can also help you figure out other sources of funding if needed. Finally, always make sure that you’re using the benefits of the mentorship and network connections offered so that you’re getting the best out of your deal.
Angel investing plays a dynamic role in the startup ecosystem by providing early-stage funding and mentorship to entrepreneurs. Angels typically bring valuable industry expertise and networks which can help young founders rub shoulders with the industry’s finest. Their support helps validate business ideas and attract additional investment which in due course leads to even more growth and success. As a founder, look for experienced angel investors and consider joining an angel group for guidance and networking opportunities. Always remember to consult with a financial advisor before making any big decision. If you’re looking for funding, call Marquee Equity at +1-213-600-7272. We help connect you to 32,000+ VCs, PEs, Family Offices and Angels to boost your business.
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