Angel investors are typically high net worth individuals who invest 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 startup financing needs of a company and their larger capital needs later on.
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:
Angel investors are wealthy individuals (or groups of wealthy individuals) who invest their own money into companies.
Venture capitalists (VCs) are employees of venture capital firms that invest other people’s money (which they hold in a fund) into companies.
Angel investors invest their own money, so it can come from a variety of sources.
Maybe they sold their own startup. Maybe they made a lot of money in another industry. Maybe it’s family money.
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.
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 putting money back into that industry.
After all, they know the industry, including the right questions to ask, what kinds of opportunities exist — and who’s BS’ing 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 investments in tech companies because they think that’s where the big upside opportunity is.
While you wouldn’t want to count out an angel investor who didn’t come from your industry, you would definitely want to seek out those who might have a built-in affinity to your industry first.
Angel investors usually come on early in the life cycle of a startup. One of the reasons they’re called “angels” is the fact that they’re willing to put money into pre-valuation startups, which may have a hard time finding funding sources elsewhere.
So how do you value a company that doesn’t have any metrics yet? One way is to really emphasize the team, rather than any numbers or metrics. Angel investors are particularly interested in investing in the founder, with less of a focus on current profit or sales, which are often non-existent for early stage startups.
However, that doesn’t mean angels are only investing in the founder. They’re also looking at more quantifiable terms, like the size of the market your startup is in, the product itself, how competitive the environment is, and — yes — whether the startup has any marketing or sales yet.
As a founder, it’s your job to convince the angel investor that you are the person to run this company and that this company is going to be a a serious player in the field.
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.
That’s it. 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.
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 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 investors peruse after your meetings.
Once the angel investor has reviewed your materials and determined they are interested in meeting you, 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.
Investors will more often invest 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 investor wants to spend 60 minutes talking about the first slide, don’t rush them. You don’t get points for presenting the 20th slide.
Focus on the conversation.
The goal of your first few meetings isn’t to “close” the angel investor, it’s to establish a relationship that will naturally lead to a close.
The investor isn’t someone looking to buy a car that you have to provide a great deal to.
Be yourself. Represent the opportunity and your passion for business. That is all you need to convince someone to do a deal.
There are two types of angel investors: affiliated and non-affiliated.
An affiliated angel investor is one that already has some type of contact with you or your startup.
A non-affiliated angel investor is someone who doesn’t have any contact with you or your startup.
You can think of them like warm and cold connections. (And, obviously, it’s always a good idea to start with warm connections when you’re looking for angel investors for your startup.)
One big advantage of working with angel investors is the fact that they are often more willing to take a bigger risk than traditional financing institutes, like banks.
Additionally, while the angel investor is taking a bigger risk than a bank might, the founder is taking a smaller risk, as angel investments typically don’t have to be paid back if the startup fails.
As angel investors are typically experienced business people with many years of success already behind them, they bring a lot of knowledge to a startup that can boost the speed of growth.
Many startup founders are learning everything from scratch, so having that kind of knowledge on the team is a huge advantage.
The primary disadvantage of working with angel investors is that founders give up some control of their company when they take on this type of private investment.
Angel investors are purchasing a stake in the startup and will expect a certain amount of involvement and say as the company moves forward.
The exact details of how much say the angel investor gets in exchange for their investment should be outlined in the term sheet.
Interested in learning about other kinds of private investment for startups? Check out this full rundown of private investors for startups.