Angel Investors — The Definitive Guide on Raising Seed Capital

Pro Business Plans
Jun 25 · 9 min read
Angel Investors

Congratulations on finding the courage to pursue your business idea!

How do I know you have one? If you are reading this article you either have a good idea you want to set in motion or you already have a business going and you want to secure more capital for it.

In any case, we want to help you on this journey by explaining in detail everything you need to know about angel investors. We have called this The Definitive Guide on Raising Seed Capital.

Ready to get started?

Let’s Start with The Basics

Who is an “Angel Investor”?

The term angel investor has its origins in the entertainment industry, where producers look for outside capital to finance their plays. They usually did so, some do so still though, by approaching wealthy individuals who were in a position to put their own money on the line for a potentially large return if the play turned out to be a success.

Yet, even though the returns offered by this kind of investments seems attractive, the risks are also high, as the play could turn out to be a disaster.

This same dynamic applies to angel investors in the sphere of startups.

An angel investor is an individual or in some cases a group of individuals, who have a high net worth ($1MM+ in assets) and have the capacity and the willingness to invest his money into business ideas that are currently on an early stage of development. They are also commonly registered as accredited investors.

These angel investors may enter the business by themselves or they can do so through what are known as angel syndicates, which is a basically a group of angel investors who decide to pool their assets, knowledge and experience to back a certain startup.

What do they invest in?

The most common way to classify angel investors is by what kind of business they invest in.

Angel investors can either specialize in certain industries or they can invest in any business venture that is appealing and makes sense for them.

· Industry-specific Angel Investors: these individuals have a vast experience in the industry they invest in. They are usually retired C-level executives who want to use their extensive knowledge and experience to leverage their investments. They can become very valuable for a business that’s on an early stage as they can help founders avoid the most common mistakes made in those industries, and they can also provide access to wide networks of suppliers, advisors and other key contacts that will help the business thrive in its respective industry.

· Stage-Specific Angel Investors: angel investors who fall in this category are more concerned about which stage the business is currently in and not so much on what industry it belongs to. They can be focused on businesses that are at a proof of concept stage, which means they haven’t even launched a beta or prototype version of their product or service, and the angel investor can provide the funds to produce that, or, they could focus their efforts into startups that have already gone through the first funding round, and they could inject the required capital to take the business to the next level.

Get a Free Consultation with an Angel Investor Expert at: Pro Business Plans

Pros and Cons of Using Angel Investors

Pros:

· They can provide both money and practical experience to the business.

· They often have access to a vast network of valuable contacts such as suppliers, advisers and even potential clients.

· They could, in most cases, provide the funding for further growth if needed.

· The cost of their investment is lower compared to other sources such as a regular bank loan.

Cons:

· They will take a significant portion of equity to compensate for the risk they are taking, commonly more than 25% of the business’ ownership.

· They commonly demand a certain degree of control over the business, which means you will have to get his consent before making certain key decisions.

· The conditions set to obtain their funding may be too stringent in some cases, or very vague in others. In any of the two scenarios, this situation often produces conflict.

Where Can I Find an Angel Investor?

Unless your business idea has gone viral or something, it’s not like people will come rushing through your doors to ask you to invest money into your startup. In order to find yourself an angel investor, you have to put yourself out there. Here are the most common places where you can find angel investors:

1. Among your Friends, Family and Closest Circle

The people around you may be the best place to start looking for an angel investor. They know you already, they have some degree of trust in you. It will be easier to pitch your idea to someone you know, rather than take it to a stranger. On the other hand, while getting someone you know on board as an angel investor for your business may seem like a logical alternative, you should define some minimum criteria for the people you would like to bring in with you in this entrepreneurial journey. As I have outlined above, angel investors should provide, additional to money, some kind of insight and valuable knowledge to your business to help you move in the right direction.

2. On Social Media

While the first name that may have popped up on your mind may have been Instagram, for the purpose of finding angel investors you may discover that Linkedin, Twitter or Facebook may prove more useful.

Many angel investors employ social media as a mean to establish a connection with business owners and entrepreneurs. If you are using these platforms to get in touch with them, make sure you have worked on a great pitch before you message them. They probably get dozens of messages on a daily basis and you want yours to stand out from the crowd!

3. Conventions / Pitch Events

The best way to meet angel investors is to find a place where they all gather!

With the rise of the entrepreneurship, many organizations devote their time to organize gatherings where startups and investors can meet and share their ideas.

Some of these events include those organized by Startup Grind, an organization that has a presence in more than 125 countries and aims to connect startups with investors through different types of events. In the United States specifically, Funding Post is an organization that also coordinates summits and events where entrepreneurs can meet angel investors throughout the entire year at different locations across the country.

Pitch Conference

Get a Free Consultation with an Angel Investor Expert at: Pro Business Plans

It’s Time to Negotiate. How to Pitch to an Angel Investor?

Build a Relationship

Most entrepreneurs think a great presentation is the key to the door that leads to funding. Nevertheless, that idea leaves out the fact that on an early stage, a business is as good and appealing as its founder.

For this reason, before you pitch your idea to an angel investor you should devote some time to get to know him. The main goal of this is to identify first, if his personality and approach suit you and secondly, to gain some insights on what are his goals, how’s his life situation and what his preferences are. The more you know him the easier it will be to shape your pitch in a way that entices him by taking into account all these subjective elements.

Ask for Advisory

Money is something everybody values highly, and angel investors are not an exception to this rule. You can be a very charismatic and eloquent pitcher, but if you find yourself presenting your ideas without facts that back it properly you’ll leave most, if not all, your meetings with your hands empty.

For this reason, before you build your pitch, you should find some help to assemble a presentation that has everything it needs. Some entrepreneurs feel more comfortable in explaining the technical part of their businesses, while they have next to no knowledge when it comes to finances. If this is your case, or if you find yourself clueless in what you should put on some of the key points of your pitch, ask for advice and make sure every single piece of information you present is properly backed by facts and done by somebody who knows how to.

Identify Synergies with their Portfolio

Take some time to research your potential angel investor and his current portfolio of investments. This could be a major key to success if you find that your business idea or startup can provide synergy with any of your angel investor’s current portfolio of businesses.

You can also be intentional in this sense, and screen angel investors with this sole criterion in mind, as they will probably be more inclined to invest if they feel they will get a return on their investment from different sources.

Venture Portfolio

I got their interest! What’s next?: Negotiating with Angel Investors

1. How Involved Will They Be?

It is important to define how much involvement your angel investor would like to have when it comes to day-to-day business operations and decision-making. There are basically two types of investors: hands-on and hands-off. Also known as Active or Silent Partners.

An active partner is one that gets highly involved with the entire business’ operations or with certain parts of it. Perhaps your angel investor has experience in Digital Marketing or in Supply Chain and they feel they can make a significant contribution to the business by managing or overseeing that portion of it. If that’s the case, you must decide if you are ok with letting them do so. If you don’t feel comfortable with allowing someone else to actively manage your day-to-day operations, then you should consider bringing in an angel investor that acts as a silent partner.

A silent partner is one that has no involvement on the daily activities of the business, but rather he offers his advice on key matters, his knowledge, experience and network, additional to, of course, his money.

2. How do We Value the Business?

One of the key elements of any investment transaction is to set a price for it. Ongoing businesses, those that have several years operating, are easier to value than startups, as the latter often has no track record and it’s harder to know how future cash flows will look like.

There are hundreds of articles on the internet that will offer insightful information on how to properly value your startup, yet we want to leave you with a list of some of the most common methods employed to do it:

· Discounted Cash Flow Model (DCF)

· Market Multiple

· Valuation by Stage

· Comparative Analysis

Startup Valuation Matrix

Get a Free Consultation with an Angel Investor Expert at: Pro Business Plans

3. Which Financial Instrument Will We Use to Set Up the Investment?

There are two financial instruments widely employed by angel investors to legally back their investments on a given business.

· Convertible Notes: a financial instrument that entitles the holder to purchase a certain number of shares at a predefined price, or discount to the price set on a future round, at a certain point in time, known as the maturity date. They are essentially debt, which means the holder has a higher claim than shareholders, but they include a feature that allows the angel investor to convert the instrument to equity at favorable terms. Convertibles notes are by far the most common instrument employed by angel investors.

· SAFE Notes: An acronym for Simple Agreement for Future Equity, these notes are a convertible security that, similar to convertible notes, entitle the holder to purchase a certain number of shares. The price at which the shares will be purchased is often set as a cap (a máximum price to be paid at that point in time) or as a discount to the price set on that future funding round. The main difference between a SAFE and a traditional convertible issue is that it has no maturity date.

SAFE Note Breakdown

Now that you fully understand how angel investors work and how you can pitch to them, start looking for the partner you need to kickstart that business idea. Best of luck!

Get a Free Consultation with an Angel Investor Expert at: Pro Business Plans

Pro Business Plans

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Pro Business Plans works with startups to Fortune 500 to prepare business plans, pitch decks, and other materials for investment and market research.

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