Angel funding sounds like it was sent from heaven, but you don’t need a miracle to find it. Whether you need a couple of thousand dollars or a few million to get your business up and running, angel investors can help. If you think critically and use your network, you can find the right investors for your business venture without needing to go the more traditional bank route.
What is an angel investor?
Angel investors are individuals or groups who invest in early-stage or startup companies in exchange for an equity ownership interest. Finding an angel investor is only half the battle, though. Once you connect, you’ll have to successfully pitch your company to secure their funding.
Often, but not always, angel investors are accredited by the Securities Exchange Commission (SEC). To be accredited, angel investors must have either of the following:
- Annual earnings of at least $200,000 per year over the past two years and projected similar near-future earnings. This annual salary minimum increases to $300,000 if the angel investor files taxes jointly with their spouse.
- A total net worth of at least $1 million.
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What are the pros and cons of working with angel investors?
With all funding sources, whether a term loan or a grant, there are advantages and disadvantages to consider. An angel investor’s offering may seem like a gift, but before taking any of their money, you’ll want to weigh these upsides and downsides.
Pros
The benefits of seeking and securing angel funding for your business include the following.
- Angel investors may take larger risks. Unlike traditional debt financers, angel investors aren’t beholden to banks or other institutions. This allows them to invest their money much more freely. As such, angel investors may be more likely to take investment risks that are virtually unheard of among banks and traditional debt financing providers.
- Your company can take less risk. Often, angel investors don’t require repayment if your company fails. This arrangement is far less risky than funding your company through business loans or other debt financing routes that require repayment no matter how your company fares. [Still want to explore traditional financing options anyway? See our picks for the best business loans.]
- Angel investors are knowledgeable. Angel investors didn’t magically acquire their massive amounts of money — they had to learn a ton along the way to grow their wealth. When an angel investor funds your company, you get access to the knowledge they’ve accrued and can use their expertise to grow your own company. An angel investor’s background can prove especially helpful if your company is a startup. Although many startups fail, an angel investor’s knowledge can help make your company one of the success stories.
Did You Know?
Getting funds from angel investors is a form of equity financing, while a traditional business loan from a bank is considered debt financing. Learn more in our guide to debt vs. equity financing.
Cons
Despite the above advantages, you may feel wary about turning to angel investors due to a few disadvantages.
- You’ll have less equity in your business. In exchange for their investment, your angel investor receives a stake in your startup. Many business owners give angel investors between 10 and 50 percent of the equity in their business, which has ramifications for your company’s decision-making.
- Angel investors become part of your business. When an angel investor has a seat at your table financially, they also get a say in your operations. This setup means less independence in your business decisions — and, in the case of an angel investor who owns more than 49 percent of your company, it means you’re no longer the primary decision-maker.
- Angel investors have financial expectations. Because of the risk angel investors take by investing in your business at such an early stage, they may demand substantial financial returns. Many investors look for around a 30 percent return on their investment. You’ll need to consider whether your business can grow at the rate the investor expects so you’re not adding too much pressure onto your startup and failing to deliver.
How do you raise angel funding?
Not every entrepreneur gets to go on Shark Tank, a TV show that’s brought the angel-investing concept to the masses. Instead, you’ll have to use a combination of in-person and online tactics to raise angel funding.
Where to find angel investors
Angel investing is all about trust and relationships. It isn’t impossible to build relationships over the internet, but it can be hard. To get the best angel funding for your business, you’ll have to get out there and meet people. You can find angel investors at events, such as fundraisers and conventions.
Online platforms and networking groups can also help you find the right people before you connect in person. The three below are among the most versatile angel investor search options for business owners of all stripes.
- Angel Capital Association: The ACA is the world’s largest angel investor association. Its membership includes tens of thousands of accredited investors and hundreds of angel groups seeking opportunities in the U.S.
- Angel Investment Network: Both business owners and angel investors can use AIN to find opportunities. As a business owner, you can create an account and then search for investors or add a pitch to the network’s database.
- Gust (formerly known as Angelsoft): To date, Gust has connected business owners with $1 billion of angel investor money. It provides business owners with a single application to send to hundreds of angel groups that can then decide whether to pursue your company as a funding opportunity.
How to pitch angel investors
After you find your potential angel investors, set up a time to meet with them independently so they can listen to your pitch. Polish your business pitch before your meeting. It should be succinct, clear and memorable. Someone who doesn’t know anything about you or your company should be able to learn everything they need to know just from that pitch.
Draw up a thorough business plan as well. If you nail your pitch, that’s the next thing your potential investor will ask for before you get any angel funding.
Prominent online angel investor platforms can connect you with hundreds of angel investors and groups.
What do angel investors look for in a company?
If you’re eyeing an angel investor to fund your business, make sure you understand what they’re looking for to improve your chances of a successful pitch.
1. Angel investors prefer experienced management teams.
Exceptional management is vital for any business. In a survey by Propel(x), three-quarters of respondents said the management team of a startup was their biggest consideration for investing. The results were based on the responses of more than 200 active and aspiring angel investors.
“Startups are not only about the technology or business idea but also very much about the people behind them,” said Swati Chaturvedi, CEO and co-founder of Propel(x). “A compelling, experienced team that can sell the vision and the potential impact is key to success, and something savvy angels look at closely.”
Some exceptional qualities your management team should possess are integrity, clarity of strategy and approach, professionalism and determination, Chaturvedi said.
2. Angel investors need to understand your product or service.
We all want to know where our money is going. Angel investors want to understand exactly what they’re financing, especially for startups in the tech field. Since angel investors are investing their own money, building their trust and establishing a relationship with them is key to gaining their support.
More than 50 percent of respondents in the Propel(x) survey claimed their ability to understand the technology as one of their top reasons for investing, and 94 percent said it’s helpful to have subject-matter experts explain the technologies within the company before investing. In fact, many choose not to invest in specific businesses due to their inability to grasp the technology.
“The easier we make it for angel investors to discover, evaluate and participate in science and technology startups, the more we’ll see money going into these worthy companies, and the benefits to humanity accrue,” Chaturvedi said in a statement.
3. Angel investors want a clear path to realize a return on investment.
Naturally, angel investors look for opportunities that will benefit them as well. Before anyone gives you angel funding, they need to know your predictions for their return on investment (ROI), or how much money they stand to make in comparison to how much they’ll risk on your business. In the survey, potential ROI was a top motivator for 49 percent of angels when making investment decisions.
While some investors are indeed looking for financial compensation, not all are primarily interested in the money. Some want a different kind of return: the ability to solve the world’s biggest challenges through the businesses they fund. Nearly one-third of angels choose to invest in a company based on its connection to important social issues.
“Having an impact matters, especially when it comes to investing in things like curing diseases, feeding a growing global population, fueling the planet with clean energy and even taking us into space,” said Lisheng Wang, Propel(x)’s co-founder, in a statement. “Science and technology startups especially should take note that when raising capital, they should emphasize the impact of their solution besides potential returns to investors. It’s not only about the ‘what,’ it’s also about the ‘so what?’”
Key Takeaway
Angel investors look to fund potentially profitable businesses with experienced leadership and clearly outlined products and services that can make a difference in the world.
Angel investor FAQS
What percentage of your earnings do angel investors want?
Angel investors typically want to receive 20 to 25 percent of your profit. However, the amount you pay your angel investors depends on your initial contract. Hammer out these details before they give you any money, and have a lawyer draw up the agreement. This will make your angel investors feel more secure in their investment.
What is the difference between an angel investor and a venture capitalist?
Unlike traditional venture capitalists, angel investors make their investment decisions quickly and rarely require a board seat as a condition of investment. They also usually invest smaller amounts of money than venture capitalists do. This makes them an attractive funding option for startups that don’t need significant investments and want to retain more control over their business.
Do angel investors receive any payment if a startup fails?
If a startup is successful, its angel investor profits. However, if the startup fails, the investor also takes a financial blow. This is because angel investors don’t recoup their initial investments, unlike venture capitalists, nor do they receive any additional returns promised to them. That’s part of the risk these investors take when they provide funding to startups.
Is angel investing profitable?
Angel investors can make a lot of money if they know what they’re doing. But angel investing can be risky, so it’s easy for an investor to lose a substantial amount of money as well. If you want to become an angel investor yourself, do your homework on the company you want to invest in and sign a contract before you hand over any funds.
Potential startups that are worth the risk have knowledgeable leadership and thorough business plans, as well as convincing pitches. Vet the startup’s leaders as thoroughly as you would for any other significant new business relationship, and your investments can pay off big time.
Taking your business above and beyond
From networking to pitching your idea and signing an agreement, there are key steps you should carefully follow if you want to secure funding from angel investors. The reward can be entirely worth the stress of the process, and with the right approach, you can give investors full confidence in your business. Then, once you have funding, you can set your startup on the path toward becoming the successful business you’ve always envisioned.
Shayna Waltower and Max Freedman contributed to this article. Some source interviews were conducted for a previous version of this article.
