Angel investors are a tried and trusted option for raising early-stage startup funding. Finding investors can be challenging. Most people can’t raise money from friends and family, it’s probably too early for VCs to be interested, so angel investors are a primary option.
An angel investor is a high net worth individual who provides financial support to startups in exchange for a stake in the business.This means they own a percentage of the company’s shares. They tend to be successful entrepreneurs or have a lot of experience in business.
Our guide explains how you can find and approach angel investors to help you raise funding for your startup.
- How do angel investors think?
- What makes a great angel investor?
- What red flags should you watch out for?
- What are the benefits of angel investors?
- Getting your business ready for angel investors
- Where can you find angel investors?
- How should you approach angel investors?
- What will an angel investor want in return?
- Exit strategies for angel investors
1. How do angel investors think?
First and foremost, angel investors are looking for a return on their investment. The odds of a startup getting to a successful exit are low, so they’re taking on a significant risk with their personal savings.
It’s important to remember that you’re selling them an opportunity; your shares are going to multiply in value before the business is sold or they get the opportunity to sell their shares to another investor in later rounds.
Angels are also interested in the impact investments make. Perhaps they want to invest in a sector they’ve had success in, so they can pass on their knowledge, or it’s a cause they believe in.
2. What makes a great angel investor?
Finding a great angel investor can be difficult, you have to know what to look out for to make sure you’re making the right choice for your business. To make this part a little easier, we’ve put together a list of attributes to look out for in angel investors.
- Passionate about startups: A great angel investor will be just as passionate about your business as you are. If they’re not, you should reconsider their offer to invest.
- Knowledgeable and experienced in your industry: Your angel investor should be an expert in the field. You’ll want someone on your team that’s both reliable and has the context to provide valuable advice. An angel investor is essentially a business partner that can offer tips and advice.
- A coach and a mentor: A great angel investor will be able to provide you with a powerful sounding board. There’s nothing more valuable than another person that can provide a new perspective, advice and mentoring.
- Has a lot of patience: As a startup founder you’re probably already aware that patience is a virtue when it comes to running a business. So it should come as no surprise that patience is an important attribute of angel investors.
3. What red flags should you watch out for?
As much as you should look out for the positives, it’s important that you take time to recognise warning signs. Bringing an angel investor on board is a big commitment. If the startup goes well, you might be working with them for the next five to 10 years.
Asking for a large equity share
Startups that give away large amounts of equity (shares) in their first few funding rounds will find it difficult to raise in the future.
Seed investment rounds tend to be 10% to 20% of a company’s shares. Beware of angel investors that ask for more than that – we see you Dragons – either they’re being unreasonable or your startup isn’t ready for investment.
Poor communication
Good communications skills are crucial for any partnership, so it’s important that you have great communication with your angel investor. If they are slow to respond, vague, or evasive, they may not be serious or committed to investing in your startup.
Misalignment of values
If your investor shares a different vision than you they may not share your passion or purpose. They may also have a different outlook on the important stuff like growth strategy or exit plan which can lead to problems later down the line. This is why its important to find an investor that has a similar set of values to you and someone who understands and supports your long-term goals.
Lack of expertise
If your investor lacks the correct experience and expertise in your industry or market, they won’t be able to provide feedback that is valuable. It’ll also be difficult for them to connect you with the right people.
Lack of trust
If your angel investor doesn’t trust you or believe in your capabilities they may try to interfere in your decision making or even try to micromanage you or your business. Look for investors that respect you and your boundaries and push you to make the best choices for your business.
Lack of references
Remember to do your research and ask for references. You can ask the angel investor if they’re happy to introduce you to other founders they’ve invested in, or get in touch with startups and ask what their experience has been like post-investment.
4. What are the benefits of angel investors?
Deciding to bring on an angel investor is a big decision. It’s important to fully understand the benefits and drawbacks before taking the plunge.
Pros of angel investors
- No regular repayments
- Availability for funding
- Less personal risk compared to a bank loan
- Rapid growth of your business
- Focus on industry
Cons of angel investors
- Loss of control and ownership
- Hard to find an angel and takes time
- Increased pressure
- Lack of formality
- Potential relationship issues
5.Getting your business ready for angel investors
Getting your business ready for investment is crucial. You’ll need to spend a good amount of time preparing your pitch and fine-tuning your business plan to secure funding. Here’s a few things to consider while preparing your startup for angel investment.
Create a business plan
Developing a strong business plan is a crucial step to attracting angel investors. You’ll want to clearly outline your short and long-term goals, strategies and financial projections. If you’re unsure where to start, download our free guide to help you create a business plan.
Develop a strong team
Angel investors want to see that your business has a strong, dedicated and experienced team helping your business succeed. This includes mentors and advisers, so don’t worry if you’re a solo entrepreneur or a pair of co-founders.
Demonstrate traction
Your investor will want to see that your company is able to prove that your concept is something that the market wants and needs. You’ll need to demonstrate that your startup is on the path to success.
Create a compelling pitch
You should be able to present a clear and compelling pitch that explains the company’s value proposition, market opportunity, and financial projections.
If you’re not sure where to begin when it comes to creating a compelling pitch, check out our article How to prepare a pitch for angel investors. You can also watch our Seed Stage episode where experts break down startup pitches.
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Financial projections
Angel investors will want to see a strong financial plan in place and a clear path to exit the investment (you can learn more about exit strategies here).
Angel investors know that there’s a huge amount of uncertainty around how your business will grow and what an eventual exit might look like. But they want to see that you’ve done the work and thought about it.
6.Where can you find angel investors
Before you begin looking for an investor, take some time writing out the key business problems you need to solve and map out the specific skills or experience that an angel investor could bring to your business.
Once you’ve determined exactly what you’re looking for, you can begin your search for an angel investor. It can be a little difficult to know where to begin so we’ve put together a list to help you get started.
Approach your personal network
One of the most popular ways of searching for investment is your personal network. You might think there aren’t any angel investors within your network but you’d be surprised at how quickly word travels, so make sure you promote what you’re doing. Chances are someone within your existing network knows someone that could be interested in investing.
Search for angel investors on online platforms
Online platforms bring together angel investors from across the UK all in one handy place. Here’s a few websites we’ve come across that offer connecting you with angel investors:
Utilise social media
Social media is a great way of putting yourself out there and letting people know you’re looking for investment. You’ll be able to notify your existing network and reach new audiences, so think about starting to build your personal brand.
Attend industry and startup events
Another great way of meeting angel investors is by attending events and conferences that are related to your industry. Industry events are a great place to network with other entrepreneurs and investors.
Take part in startup pitch competitions
Events like The Pitch brings together startup founders and investors from across the UK giving you the opportunity to pitch in front of industry-leading investors who would love to invest in your startup.
Our past pitchers have done some pretty incredible things since competing, if you’d like to learn more about our alumni and what they’ve got up to since The Pitch visit our alumni page. Learn more about entering The Pitch here.
7.How should you approach angel investors?
Compile a list of angels you want to approach using the previous step. You might need to have 30 or even 100 conversations before you’re successful, so dig deep on your research. Then it’s a case of reaching out via LinkedIn or email to try and start a conversation.
When it comes to approaching an angel investor, first impressions count. You need to ensure you know the ins and outs of your business and be prepared to answer any questions (if you want to practise, we’ve put together a handy guide to The top 41 questions that investors ask early-stage startups after pitching).
There’s a few things you should have prepared before approaching your investor, these include:
- Your business plan
- Profit and loss statements
- Balance sheet and cash-flow statement
- Any existing shareholder agreements
Remember that your angel investor will evaluate you as well as your business, how you present yourself and how well you react to feedback. This is your chance to demonstrate your knowledge of your business as well as your management and organisational skills.
8.What will an angel investor want in return?
Typically, angel investors will receive a minority ownership stake in your company. This is usually anywhere between 10% to 30%. There are a few key things an angel investor will want in return for investing in your startup:
Return on investment
Angel investors will be looking to receive a good return on their investment. The exact rate they expect depends on the angel, the nature of the investment and the size of your business.
Angels tend to invest in several startups knowing that some will fail or mature into lifestyle businesses where there’s no chance of an exit, and others will have successful exits. This means that the successful companies need to provide 5-10x returns for the whole portfolio to be successful.
In the first five minutes of this Seed Stage episode about investment term sheets, angel investor Sam Simpson talks about his portfolio and what returns he expects.
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“I’ve got 31 investments, of which four have died and I’ve had one successful exit. I got 11x my cash return from that investment, so I’m very happy with that one,”
FounderCatalyst founder Sam Simpson
Get more involved in your startup
If your angel investor chooses to invest in your business they might ask to have some involvement in running your business, usually at board level.
This isn’t a bad thing, it’s more than likely that your investor has valuable experience in a similar business or industry and is looking to help you and provide you with some valuable advice.
9.Exit strategies for angel investors
Naturally, after some time your angel investor may be looking to implement their exit strategy. This will be strategically planned and ideally with a substantial return on investment. Here’s some common exit strategy types:
- IPO (Initial Public Offering): Taking the startup public by offering shares to the public on a stock exchange.
- Acquisition: Selling the startup to a larger company or competitor.
- Merger: Merging the startup with another company to create a larger entity.
- Secondary sale: Selling your stake in the startup to another investor or a venture capital firm.
Here’s a list of related resources we found particularly helpful while writing this guide:
- British Business Bank: Angel Investors
- Swoop: How to find angel investors
- Beauhurst: Most Active Angel Investment Networks in the UK
- DigitalOcean: How to find angel investors for your startup
- Seedrs: How To Find, Approach and Pitch to Angel Investors
- RobotMascot: A complete guide to angel investors for small businesses and startups
- The Pitch: Looking for angel investors? Here’s everything you need to know
