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Angel Investors — The Definitive Guide on Raising Seed Capital

Last Updated: 1/2/2022

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 Angel Investors — The Definitive Guide on Raising Seed Capital.

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 investment seem 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 ($1M+ 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 or an angel group, which is basically a group of angel investors who decide to pool their assets, knowledge, and experience to back a certain startup.

What do angel investors invest in?

The most common way to classify angel investors is the types of businesses 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 vast experience in the industry they invest in. Individual angel investors 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.

Signup for a free webinar: Raising Capital for Your Startup: How to Raise Money for your Business Venture from Seed to Series-A

Pros and Cons of Using Angel Investors

Pros:

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

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

· An angel investor could, in most cases, provide the funding for further growth if needed.

· The cost of the angel investor capital is lower compared to other sources such as a regular bank loan.

Cons:

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

· Angel investors 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 angel investor 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 or small business. 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, in addition to money, some kind of insight and valuable knowledge to your business to help you move in the right direction.

2. 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 means 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. The average angel investor 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 or venture capital is to find a place where they all gather! Many of these cost, so be prepared to use some of your own money to attend them.

With the rise of 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, some organized by angel investors directly.

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.

Angel Investor Pitch Conference

How to Pitch to an Angel Investor

Why VCs and Angel Investors Say “No” to entrepreneurs | Alicia Syrett | TEDxFultonStreet

Build a Relationship

Most entrepreneurs think a great presentation is a 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 or for venture capital you should devote some time to get to know her. The main goal of this is to identify first, if her personality and approach suit you and secondly, to gain some insights on what are her goals, how’s his her situation, and what her preferences are. The more you know your potential angel investor — the easier it will be to shape your pitch in a way that entices her 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 within the Angel Investors’ Portfolios

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 the business idea for your startup or small business can provide synergy with any of your angel investor’s current portfolios 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

Investor Pitch — How much should an investor get?

1. How Involved Will Angel Investors 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. Some angel investors provide a lot of added value, whereas others believe it is best to not get involved unless called upon. Typically angel investors are more active than venture capital.

An active partner is one that gets highly involved with the entire business’ operations or with certain parts of it. For instance, angel investors provide 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 an angel investor that has no involvement in the daily activities of the business, but rather he offers his advice on key matters, his knowledge, experience, and network, in addition to, of course, her 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 angel investors use to do it:

· Discounted Cash Flow Model (DCF)

· Market Multiple

· Valuation by Stage

· Comparative Analysis

Startup Valuation Matrix

Signup for a free webinar: Raising Capital for Your Startup: How to Raise Money for your Business Venture from Seed to Series-A

3. Which Financial Instrument Will Angel Investors Use?

There are two financial instruments widely employed in angel investment for equity financing to legally back their investments in a given business startup.

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 convertible security that, similar to convertible notes, entitles 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 maximum 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 most angel investors and venture capital works and how you can pitch to them, start looking for the partner you need to kickstart that business idea.

Commonly Asked Questions

What do angel investors look for?

At the earlier company stages common with angel investing, the team and overall company’s ‘product-market fit’ is reviewed. That is, are you really solving a problem people are willing to pay for and how unique is to comparable options?

Perhaps more importantly, who is your team and why are they qualified to create a billion dollar company? These are similar to the same things reviewed by venture capitalists, but they tend to be more metrics driven around performance and revenue.

How much do angel investors invest?

Typically, equity financing ranges from $250,000–$3 M, but they can go as high as $5 M or more. Although this is rare because in angel investing, unlike venture capitalists, they tend to spread their capital with much smaller check sizes over a many more companies. These are much smaller check sizes comparatively than venture capitalists, which can do checks in the hundreds of millions or more.

How do angel investors make money?

All About Angel Investing

Angel investments and venture capital makes money when the company is sold or acquired, they may also offload shares onto the secondary market and be compensated directly. During this time, they receive their initial investment back in addition to anything beyond the amount they invested.

In other cases, angel investing done as part of a fund then pays back their own investors and receives an annual management fee and performance based percent of the capital returned. (Note: These tend to be more common with professional angel investors, who have made a career out of their investment management.)

What is the difference between angel investors and venture capitalists?

The primary difference is angel investing deals with smaller check sizes than venture capitalists. Also, angel investing tends to be less structured and formal than venture capitalists because the smaller check sizes can be done by a single individual, whereas venture capitalists often operate through an investment fund of managed capital pooled from wealthy individuals.

How much do angel investors expect in return?

The equity received in angel investing ranges depending on your stage and valuation. In some cases, different valuation methodologies are used by venture capitalists. This is true because there is less performance to base the valuation on and the risk of failure, being an early stage, is higher. However, there are several valuation methodologies we outline in this article.

How do angel investors get paid back?

In angel investing and venture capital, the return is generated when the angel funder sells her shares. This may be done over time, to other investors before the company is acquired or goes public, or once the company is sold.

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