Angel investors are real—they’re not just “characters” you see on TV’s Shark Tank. But that doesn’t mean they’re right for your business.
First, let’s address exactly what an angel investor is.
Angels are often confused with venture capitalists—and while their goals might be similar (investing in businesses with high-growth potential) the paths they take to get there are different.
Angels are private investors or groups of investors who invest in small businesses. Unlike venture capitalists, who invest and manage other people’s money, angels invest their own money. Angels are often located in the area as the entrepreneur since they tend to be involved in the business.
Angels aren’t looking for ideas. Though they invest in early-stage businesses, they’re usually on the lookout for companies that have market traction, meaning they already have products they’re selling or services they’re offering.
The good news is there are more angel investors looking for companies to invest in.
According to the University of New Hampshire’s Center for Venture Research last year, “The angel investor market saw [increased] market participation in more companies but at smaller amounts. Total investments in 2018 were down 3.4% from 2017 to $23.1 billion. More than 66,000 entrepreneurial ventures received angel funding, up 7.4% over 2017. And the number of active investors in 2018 rose to 334,565 individuals, an increase of 16%.”
There are guidelines for working with angels.
The Angel Capital Association (ACA) ACA advises business owners to only work with accredited investors “who can add value to the company via high quality mentoring and advice.” According to CNBC, angel investing is starting to attract “less-affluent investors” who’ve started investing via equity-crowdfunding platforms.” (There are federal guidelines for this practice.)
According to CNBC, the increase in angel investing is likely due to investors having “deeper pockets” due to the strong economy, which has created cashed-out entrepreneurs wanting to stay involved in the world of startups.” And, Shark Tank has actually made a difference, shining a lot of light on the process.
So, what are the angels looking for?
A return on their investment, obviously. In addition, the ACA says angel investors want to:
- Make a return on their money
- Participate in the entrepreneurial process
Not all startups (even ones on the fast track) are ready for angels to invest in them. How do you know if your business is ready?
Before you pursue an angel investor the ACA recommends asking yourself the following questions:
- Am I willing to give up some amount of ownership and control of my company?
- Can I demonstrate that my company is likely to realize significant revenues and earnings in the next 3-7 years?
- Can I demonstrate that my company will produce a significant return for investors?
- Am I willing to take the advice from investors and accept board of director decisions I may not always agree with?
- Do I have an exit plan for the company that may mean I’m not involved in 3-7 years?
Angel groups are a good place to find an angel. These groups can be found in the member directory of the ACA. Or ask your industry trade association if they have any suggestions. In addition to the Angel Capital Association (ACA), you can find resources at the Angel Resource Institute (ARI), Gust and New York Angels.
Jeffrey Sohl, director of the University of New Hampshire’s Center for Venture Research told CNBC that angels are “value-add investors. Don’t just look at [angels] as a source of cash. Look at what’s coming with the money—what kind of advice, what kind of experience.”
You need to be prepared before you pitch an angel.
That means you need a solid business plan, financial statements and projections and a well-defined goal. They also want to know that you’re ready to follow their advice. Remember, the end goal is to sell the company, so you need to be prepared to give up what you’ve built.
Your SCORE mentor can help you figure out if seeking investment from an angel is the right move for your business.