Angel investors are typically high net worth individuals who make investments very early into the formation of a new startup company, usually in exchange for convertible debt or equity. The role of angel investors serves as a critical bridge between the early stage startup financing needs of a company and their larger capital needs later on from venture capitalists, corporate investors, all the way to becoming a publicly traded company.
In order to be an angel investor, a person does not have to be an accredited investor. However, a lot of angel investors are accredited investors.
In order to be an accredited investor, according to the Securities Exchange Commission (SEC), a person must:
Have made at least $200,000 a year (or $300,000, for a couple) for the past two years and must have the expectation of making that amount again
Have a net worth over $1 million, either alone or together with a spouse (excluding the value of the person's primary residence)
Learn more about accredited investors and how it impacts their investments on the Investor.gov website.
Angel investors typically invest their own money, so it can come from a variety of sources.
Many angel investors sold their own startup or local business. Other angel investors made a lot of money in another industry or previous investment in startup companies. Maybe it's family money and they started life as wealthy individuals.
There's no one “where” that we can point to as a primary source of funding for angel investors.
Angel investors tend to invest in companies that are in industries they know a lot about, unlike a venture capitalist firm that may have a very diverse investment portfolio.
So, for example, if an angel investor made a lot of money in the real estate industry, you can imagine they would be most comfortable making an investment in a business idea in real estate versus tech startups.
After all, they know the industry, including the right questions to ask, what kind of opportunity and risk exists — and who's BSing them.
That's not to say that it's the only criteria for angel investors. They may have made their money in gold mining, but are looking to make an investment in a tech startup because they think that's where the big upside opportunity is, or future interest from venture capital firms bringing liquidity or an exit.
While you wouldn't want to refuse angel funding from investors who didn't come from your industry, you would definitely want to seek out investors who might have a built-in affinity to your industry first.
While these investors are called “angels,” don't worry — it's easier to find than ever to find investors. It's not easy, but it's easier now than ever.
Here are four places for finding an angel investor who are interested in your startup.
A good first place to start to raise money is your own friends and family, especially for seed rounds. Are there high net worth people in your personal networks who are already investing in startups? A warm connection is always to your advantage when you're fundraising for startups, as most people are more willing to invest in people that they know than in those they don't.
So ask around.
You might be surprised to find an uncle who's looking to invest or a cousin who just came into some money and is looking for something to do with it.
There are angel investor networks and groups that, on the surface, look like the best and efficient way to get in touch with angel investors. But consider one thing: If you could find them, so could other founders.
Angel funding is in high demand. That means angel investors get bombarded with emails, pitches, and proposals. Do your homework and find a warm connection, even when approaching an angel group or angel investment network. It's your best bet if your goal is to actually get in front of angel investors and not just to end up automatically in the reject pile. Even with the increased efficiency of belonging to angel networks, they often receive more deal flow than they can handle, unlike venture capitalists who have associates and systems in place to handle the masses who seek funding.
Angel investor events happen across the country. They're a great opportunity to get your startup in front a range of angel investors who are actively looking to invest. Do a quick search engine search to see if any pop up in your region.
Recent years have also seen a mini explosion of online platforms for angel investors. Angel Capital Association is one, Fundable.com is another, each with more than 10,000 accredited angel investors. Each site is going to have its own requirements and expectations for connecting with angels, however, so pay attention to the rules and processes outlined on their sites.
It's not that hard to figure out how to pitch angel investors properly. Most of it comes down to common sense and just treating angel investors the way you would want to be treated.
Despite what you may think, if you want to pitch angel investors you're not expected to go through some elaborate sales routine. It's a matter of presenting great information in a compelling way, but doing so honestly and with compassion.
The first thing you're going to send to angel investors is your elevator pitch. Your elevator pitch isn't a sales pitch. It's a short, well-crafted explanation of the problem you solve, how you solve it, and how big of a market there is for that solution.
You don't need to “sell” the angel investor in the introduction. Your opportunity should speak for itself.
But sending your elevator pitch along with a 20-megabyte PDF document is a surefire way to never even make it past an investor's spam filters.
Instead, you should send a link to your pitch profile, which is an online profile that explains a little bit about your deal and provides a way for the investor request more information.
When and if the angel investor responds to your email, you'll either get a short “no” or a request for more information. Most angels will request either an executive summary or a pitch deck, which are pretty similar.
The angel investor isn't interested in finding out as much information as possible about your deal at this point. In fact, they're looking to find out a little information about your deal — just enough to determine whether or not they want to spend more time with you.
So don't inundate the investor with every last piece of information you've ever collected for fear of them “not seeing everything.”
They are likely reviewing a dozen other deals at the same time so they couldn't review your tome of knowledge even if they wanted to (which again, they don't). Simply let them know that more information is available upon request.
The more traditional request from an investor is to ask for an executive summary. Over the past decade this has become less and less common, with most preferring a pitch deck as a first step in evaluating investment decisions.
The executive summary is a two to three page synopsis of the business plan that covers things like the problem, solution, market size, competition, management team and financials. It is typically in narrative format and covers a paragraph or two about each section.
You can expect the angel investor to jump to the one section he's most concerned about, read a couple of paragraphs, and then maybe look a little deeper. He figures you'll answer most of these questions in your pitch meeting, so he's not going to spend too much time on your docs.
A more likely request is that you send over a pitch deck. A pitch deck is essentially your business plan or executive summary spread across 10 to 20 slides in a PowerPoint document.
Investors like pitch decks because they force the entrepreneur to be brief, and hopefully use visuals instead of an endless list of bullet points. The pitch deck is your friend and most trusted ally in the angel investor pitch process.
You'll use it as your main collateral item to get meetings, it will be the focus point of your meetings, and it will be what potential angel investors peruse after your meetings.
Once the angel investor has reviewed your materials and determined they are interested in investing, you'll obviously put together a time to go in for a pitch meeting.
Your pitch meeting is more about the investor liking you as a person than it is just pitching your idea. Take a little bit of time to try to establish some rapport before jumping to asking them about investing.
Investors will more often make an investment in an entrepreneur they like with an idea they have some reservations about than an idea they like and an entrepreneur they think is a jerk.
During the pitch, you'll run through your pitch deck and answer questions. The goal isn't to get to the end of the pitch deck in 60 minutes or less. The goal should be to find an aspect of the business that the investor actually cares about and zero in on that point.
If the potential investors want to spend 60 minutes talking about the first slide, don't rush them. You don't get points for presenting the 20th slide. Angels often have tons of questions, and that's a good thing, it's a sign they are considering investing.
Focus on the conversation and how their investments will move the business forward.
The goal of your first few meetings isn't to “close” the angel investors, it's to establish a relationship that will naturally lead to raising capital.
The investor isn't someone looking to buy a car that you have to provide a great deal to - you have to represent a compelling angel investment opportunity.
Be yourself. Represent the opportunity and your passion for business. That is all you need to convince angel investors to consider an investment.
And, of course, angel investors aren't the only options for startup funding. There's venture capital. Private equity. Loans. Crowdfunding. There's a whole world of funders out there making investments! Don't miss our guides to the full range of startup funding options, below: