Angel funding is a way to raise money for your business with the help of angel investors, who offer seed money to promising startups or small businesses in exchange for an equity stake in your company. To receive angel funding, you’ll need to do your due diligence in vetting an angel investor best suited to your business needs and goals. Particularly, one who can offer experience and advice applicable to your operations.
In this article, we’ll walk you through the steps on how to raise angel funding for your business—from connecting with and setting meetings with angel investors to outlining the terms of the agreement and how to maintain relationships with investors.
Step 1: Connect With Angel Investors
Finding an angel investor can be competitive and difficult if you don’t already have network connections. Establishing a relationship can take a lot of time and effort, but it’s worthwhile to secure future funding opportunities for your business.
If you’re seeking an angel investor, look for someone:
- Who is a seasoned investor: You want to work with someone who is comfortable with potential risk and can mitigate it by helping you navigate your business growth with a positive trajectory.
- With industry experience: Someone with knowledge specific to your industry can provide valuable feedback on your product or service and can offer insight into how to achieve your long-term business goals.
- With shared involvement ideals: You may want an investor who either has a hands-off approach or wants to be heavily involved in the operations of your business.
There are a few ways to connect with angel investors, whether it be through an existing business connection, a networking opportunity, or an online directory. When beginning your search, look for a networking event near you, or you can check out online directories, such as the Angel Capital Association and the Angel Investment Network.
Step 2: Present Your Business
You’ll need to stand out to get the attention of an angel investor. Usually, they seek up-and-coming businesses that have strong growth potential and bring something unique to the market. Presenting your business plan to an investor is crucial to succeed in capturing their interest.
Your business plan should outline key details regarding the offerings, operations, and financial status of your business. When preparing a presentation, consider creating a pitch deck to highlight the key points that can help land you the deal.
Here are some key points you should include:
- Who and what your business represent
- The solution to a problem your company solves
- The market need for your product or services
- How you differ from competitors
- The structure and size of your company
- Company goals and their timeline
- Funding amounts and usage
- Future company growth and financial performance
Step 3: Set Meetings With Potential Investors
If you have investors who are willing to learn more about your business, you should schedule a meeting to discuss your presentation and answer any questions they may have. Whether it be via phone call, email, video chat, or in-person meeting, this is your opportunity to further network and promote your business. Even if they end up passing on the deal, they may be able to put you in touch with someone else who may be interested.
Step 4: Outline Terms
If there’s interest from investors, you can begin to outline and negotiate the terms of your agreement. Items to discuss include equity financing or convertible debt, ownership percentages, level of involvement, funding timeline and structure, along with feedback or questions before the final details are put in writing.
Step 5: Draft an Agreement
An agreement that defines the terms from the previous step will need to be drafted. Often used is a convertible note, which is a financial agreement that states the investor has the right to partake in a debt-to-equity conversion at a later date. This conversion takes place when the business reaches a specific valuation, and in the meantime, the investor receives interest payments for the loan provided.
With this, you’ll need to consider what’s known as a valuation cap. Essentially, a valuation cap is included in the agreement as a safety net for angel investors. This sets the maximum valuation that the debt can be converted into equity so that the investors’ portion of the equity isn’t unfairly reduced in the instance of a higher valuation in later funding rounds. As such, investors are offered a discount on the conversion before valuation, usually anywhere from 15% to 25%.
Step 6: Keep Up With Your Relationships
Since the funding process can be lengthy, maintaining a strong relationship with your investors is important. Being transparent and providing continued communication by addressing all of their questions or concerns upfront will build trust and sustain a healthy business partnership over time.
Who Angel Funding Is Right For
While not suitable for everyone, using an angel investor to source funding can be a viable option if you’re a business with limited resources. Angel funding may be a good fit for your business if you are:
- Comfortable with the expectation of rapid growth: Angel investors will want to see a quick return on their investment, so you’ll need to have plans to be able to grow your business swiftly and be comfortable doing so.
- Willing to involve others in your business: Since you’ll be offering an ownership percentage of your business to investors, you need to be willing to allow input and directive from anyone you offer stakes to.
- Ineligible for traditional financing: If you currently don’t have the budget for the monthly payment that comes with getting a small business loan, offering equity stakes to an angel investor is an alternative way to access funds.
- Offering a unique opportunity for investors: Angel investors are very selective when it comes to the businesses they choose to back. You’re more likely to gain the interest of one if your business offers a product or service that is unique to the market or in high demand.
Alternatives to Angel Funding
In the instance you are unable to secure angel funding, there are a few alternative startup financing options that can support your business.
- Friends and family loan: Sourcing funds from friends and family is a less formal financing option. It is typically the most accessible and provides more favorable terms.
- Small Business Administration (SBA) loan: This is a good traditional funding source for small or startup businesses with a solid credit history. These loans are backed by the government and offer favorable rates and terms.
- Business line of credit: This can provide revolving loan funds to be drawn upon on an as-needed basis, to be repaid over time.
- Personal business loan: Based on your personal credit, personal business loans provide flexible funds that can be used to support your business. For our recommendations, see our list of the best personal loans for business funding.
- Rollover for Business Startups (ROBS): Use funds from your personal retirement account with an investment of $50,000 or more.
Visit Guidant Financial for more information about ROBS and other small business financing opportunities.
Frequently Asked Questions (FAQs)
No. Angel investors are typically offered an equity stake in the business, rather than paying back funds in installments like a traditional loan.
Usually, amounts range anywhere from $5,000 to $200,000. However, it may vary depending on your business needs and what the investor has to offer.
Funds received can be used for a variety of different business expenses, whether it be inventory, equipment, or other growth costs. There are usually no restrictions—unless previously agreed upon with the investor.
Bottom Line
Now that you know how to get funding from angel investors, you can decide if working with them is in your company’s best interest. If you choose to work with an angel investor, ensure that it suits your business needs and that you can meet the expectations required to grow your business. It’s a worthwhile effort to consider all startup financing options available to you before making a decision.
