Starting your own business can be a huge step, and while entrepreneurship is exciting and often worth the work in the end, it’s not always easy. You might find yourself echoing the Real Life 80s hit, crying “Send me an angel!” as you try to figure out how you’re going to get your fledgling company off the ground.
Luckily, the financial world is prepared to do just that. Angel investors are often looking for worthwhile risks to take with their money, and with the right idea and a good amount of business sense, you could catch the eye of someone willing to invest in your business.
But angel investors aren’t as charitable as their moniker indicates: they’re businessmen and women who want something from you too. We’ve covered the basics of angel investment as a way to fund a startup business so you can see if this path is one you’d like to travel.
What Are Angel Investors?
Angel investors are people with high net worth’s who are looking to grow their wealth by investing in new business ideas. They aren’t offering grants or funding you out of the goodness of their hearts, which means they’re looking for business ideas they believe have real merit — and a real chance of succeeding in the marketplace.
Of course, not every business angel investors fund does succeed, which means these investors are looking for a big return when companies do hit it big. Some investors want as much as 10 times a return on the initial investment, so this isn’t a “cheap” way of funding your startup.
How Does Angel Investing Work for Startups?
While it’s not impossible for angel investors to provide the seed money for a startup, typically they come in as a secondary investor to help you grow an existing, fairly new company.
Seed money is literally the funds you use to plant the seeds of your business — the money used to pay for things like a business license, some first prototypes or business planning. Commonly, seed money comes from your own pocket, gifts or loans from family and friends or even a credit card. If you’re lucky enough to connect with an angel investor this early in your business startup — and that investor buys into your idea — he or she may also contribute seed money.
More commonly, angel investors fund the next wave of capital for your business, providing on average $25,000 to $50,000. In some cases, angel investors might fund much less or much more, but when you get into hundreds of thousands in funding, you’re getting away from angel investing and into venture capitalism territory.
You’ll work out the terms of investment with each individual angel investor. Options might include a percentage of profits in the company up to a certain amount or payments set to be made based on the business making it to certain success milestones.
Angel investment isn’t always formal, and you can connect with these individuals in a variety of ways. They may be someone in your professional network who believes in your business idea and wants to put their money to work. You can also find potential angel investors online; sites such as Angel List connect companies and potential investors.
How Your Business Can Qualify for Angel Investment
The requirements for funding depend on each investor. Unlike bank loans, angel investment rarely depends heavily on personal or business credit histories. Instead, angel investors are looking for great business concepts fronted by people with the right skill sets to succeed. To land funding from one of these investors, you’ll need:
A great business idea
A solid business plan
A winning pitch and pitch deck
A little bit of luck
A lot of persistence
What Are the Benefits of Funding From Angel Investors?
Angel investing is a tried-and-true method for gaining capital for your business. Companies like Apple and Starbucks started with angel investors, and the arrangement can be a huge win for everyone involved.
Some angel investors are experienced entrepreneurs, and they may even be willing to offer advice or other resources to help ensure your business is successful. Because the terms are between you and the investor, you can also develop a financial plan that works well with your business plan, which isn’t always the case with traditional loans.
What Are the Disadvantages of Funding From Angel Investors?
Perhaps the biggest disadvantage of funding from angel investors is the difficulty of obtaining it. If you don’t have the right presentation skills or the ability to articulate your concept in a way that resonates with investors, you’re unlikely to receive funding.
Plus, since angel investors put a lot on the line (financially speaking) for the companies they fund, they aren’t going to write a check without checking up on you. Angel investors do a lot of due diligence, and you may have to answer numerous questions, attend several meetings and make more than one presentation before you get an answer about funding.
The Bottom Line
Angel investors tend to gravitate toward certain types of startup concepts. Tech startups have always been a beacon for this type of funding, but anything that is innovative or unique could catch investor interest.
Even a more mainstream business concept can attract angel investors if you can make a case for a high potential for return.
Angel investing certainly isn’t for everyone, and it’s not generally worth doing all this work if you only need a few thousand dollars to launch your startup and get startup business financing. Generally, you’ll want to wait until you need $25,000 or more in funding that can’t be achieved through easier means before you start working to attract this type of investor.