Angel funding is the process of raising money from investors who exchange their money for part ownership in your business. It’s a less formal and lower-effort process than raising money from professional investors, such as venture capitalists.
Some startup business owners begin their financing search using alternative funding methods like angel investors. Others will turn to angel funding only after investing their own money or asking friends and family for help with startup financing. Businesses needing additional funding rounds after angel investments usually turn to venture capital investments or startup business loans.
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
Angel investors receive an equity stake in your company or a convertible note and typically contribute funds to startups based on their interests. It may be difficult to find them—or even get funding, so consider the pros and cons of angel investing before moving forward. But if you have already decided, then follow the eight 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
- Individuals looking to invest: You have to find people interested in investing personal funds into your business.
- Target industry: You’re looking for someone interested in your product or service.
- 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:
- AngelList: Matches startups with angel investors.
- FundersClub: Has more than 28,000 members looking to invest in startups.
- Gust: Network of vetted experts looking to invest in startups.
- Angel Capital Association: Lists angel groups by region and accredited investment platforms.
Before you begin reaching out to potential angel investors, make sure you’ve prepared an elevator pitch. You might get just a matter of minutes to pitch your startup to a potential investor. So, prepare a 30- to 60-second pitch that hits all the important points about your business.
Step 2: Prepare 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
Some angel investors might want to see your business plan, so it’s a good idea to put together a comprehensive plan before presenting your pitch deck.
Step 3: Have a Preliminary Meeting
Once you have that elevator pitch, you’re ready for a preliminary meeting with a potential angel investor. It might be a video call, an email, or an in-person meeting. This will be your chance to pitch your product or service to them and gauge their interest in a potential investment.
Step 4: Present Your Pitch
With your pitch deck prepared, it’s time to present your pitch. Explain why an angel investor should be interested in your business. Show how you’ll grow your business and why this is the ideal time to invest in your growing business.
Step 5: 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 6: 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 which 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 7: Follow Up Regularly
The process of securing angel investing up to the point you receive funding takes some time. Be sure to follow up with your angel investors regularly to answer any questions they might have and clarify any timelines regarding the funding of the investment. Communication between you and your new business partner is crucial.
Step 8: 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:
- Rollover for Business Startups (ROBS): Ideal for businesses with owners willing to invest retirement funds of $50,000 or more. Check out the Guidant Financial website for more information on ROBS or to speak with a ROBS specialist.
- Small Business Administration (SBA) Loan: Optimal for businesses with good credit and a solid business plan that don’t need funds quickly. Guidant can also help you with SBA loans for startups.
- Personal loan for business: Best for business owners with good personal credit needing up to $50,000 in funding. LightStream is an excellent choice for an unsecured loan that you can use to fund your business.
Angel investors contribute personal funds to startups in exchange for equity in the business. Angel funding can be challenging to secure—and even finding an angel investor might prove to be difficult. If you find an investor, you need to convince them that your business offers an innovative product or service that will grow rapidly and provide a strong return on investment.
Not every business will be suited for angel funding, and you might not be willing to give up ownership in your business to an investor. Many other alternatives to startup funding don’t involve giving up equity in your business, so consider all of your options before moving forward.