One of the most effective resources for raising capital (especially if you’re just starting out) is the angel investor. Their numbers are growing daily because today’s investors are seeking better returns on their money than they can get from traditional investment vehicles. And this is good news for you.
What is an Angel Investor?
An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. While angel investors are commonly individuals, the entity that provides the funds can be a business, a trust, a limited liability company, an investment fund, etc.
By law, angel investors need to meet the Securities Exchange Commission’s (SEC) definition of accredited investors: They each need to have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).
Where do I find Angel Investors?
Angels are very comfortable investing in opportunities they’ve found through friends, family, business associates and organizations they belong to – so it’s important to cast a wide net.
Angel investor networks. Angel networks are groups of angel investors who pool their resource to invest collectively. Following a presentation from a potential startup, the group reviews the business proposal and decides, as a group, to invest or not.
Boutique investment bankers. These are small firms that focus primarily on small financing deals by finding angels for entrepreneurial companies. They charge a percentage of the amount of money they raise for you.
Business brokers. Brokers are a well defined group with connections to hundreds of people with money who are interested in buying businesses. Yes, you’re not interested in selling your business and brokers aren’t usually too keen on clients just buying part of a business, but brokers usually know which of their clients have a soft spot for helping entrepreneurs and will provide an introduction when they see a good fit.
Customers – past and present. Do they use your product or service to make or sell their own goods? Like vendors and suppliers, these potential angels may already have the relationship and comfort level they need to invest in your business.
Do you have customers that rave about your product or service? This is a great pool of potential angels to approach because they believe in you and your product/service and investing may feel like the next natural step for them.
Employees. While discernment is the key here, shared ownership in a company is a well proven incentive. It can be a mutually beneficial relationship that creates an enhanced sense of loyalty and personal responsibility for the company’s success as well as boosting morale and production.
Entrepreneurs. Successful business owners like investing in other entrepreneurial ventures, especially if they’re already familiar with the industry.
Family and friends. This is a great pool of angels that is already personally familiar with your passion, work ethic and perseverance. While all investors are looking for a return, their primary incentive is wanting to invest in YOU. The pro and con is that this is almost always an emotional and very personal decision for them. In order to preserve these relationships, great care must be taken to set realistic expectation for all parties involved.
Middle managers. Consider that most middle managers are at a stage in their lives where they’re either bored with their jobs or are looking for outside interests. Many are nearing retirement but don’t feel like they’re ready to give up the game. Angel investing offers them the perfect opportunity to get their juices flowing again.
Networking. Because angels often find investment opportunities through friends, family, business associates and organizations they belong to, networking and joining network groups is an effective (although time-consuming) way to spread the word.
Professionals. They’re usually an obvious choice because they’re most likely to have discretionary income available to invest, and when they’re not interested or your business is not a good fit, there’s a good chance they know a colleague or friend who is. Think lawyers, doctors, accountants, brokers, etc.
Vendors or Suppliers. They already have a nuts-and-bolts understanding of your industry as well as your product/service and angles are more likely to invest in a field where a comfort level already exists. And because they have a vital interest in your company’s success, they often become very motivated angles.
Thank you for joining me today. I hope you’ve found this post an informative introduction to Angel Investors.
Do you have any angel investor questions you’d like to see answered? Shoot me an email and if your question is selected, I’ll send you a signed copy of my book, “Raise Capital Quickly”