You’ve already tapped into your friends and family for funding for your start-up. What’s the next step? You’ve probably heard of angel investors. Small businesses looking for financial help can turn to an “angel”. Angels are individuals willing to invest in promising start-up opportunities. These investors are the most likely candidates to get your businesses from idea to proof-of-concept. Many angel investors are former business owners themselves and are interested in furthering their industry and helping people with innovative ideas. Most of these angel investors will be great assets to your team because they will provide good advice based on their previous experiences. But it’s not as easy as asking for a blank check. Today, the environment is more competitive than ever. For entrepreneurs, gaining an angel investment may be a complicated process, especially given that, statistically, most startups will fail.
Who are Angel Investors?
Anyone can be an angel investor. Most of the time, angel investors are successful entrepreneurs interested in helping out the next generation. The only thing that matters is that they are willing to invest thousands of dollars in your business in return for a piece of the action! Most angel investors made their money in tech start-ups or by starting their own company and walking away with a small piece of the pie. These former entrepreneurs are likely to re-invest their money in startups to stay integrated in the scene. Angel investments are the perfect choice for a business that is already beyond the startup phase, but are still early enough in the game that they need capital to develop their product or fund a marketing strategy.
How does Angel Investing work?
Angel investors need to meet the Securities Exchange Commission’s (SEC) definition of “accredited investors”. To get accredited as an investor, they need to have a net worth of at least $1 million or to earn salary of $200,000 or more for at least two years (or $300,000 a year jointly with a spouse). In return for the angel investors providing you with money, you can sell them equity in the company, filing the investment with the SEC. The average angel investment is around $600,000. Most investments rounds also involve multiple investors, thanks to angel groups.
Friends and Family Investments
Friends and family investors have their pluses and minuses. On the positive side, these are the people you know best, so they know whether or not they can trust you’ll earn them a return. Friends and family may be more likely to back you because they believe in your integrity. However, they are less likely to perform thorough research around the prospect of an economic return, and are not familiar with the ins and outs of investing. They also won’t be able to provide you with great advice due to their lack of experience in the industry. The negatives are pretty major: these are your friends and family! We’ve all heard the saying before– don’t mix personal and professional relationships. And, as we know, only one in 10 startups will be successful. That being said, there are very high odds you lose all the money invested by your closest friends and family, which will make for a very Thanksgiving conversation. Despite the negatives, for many startups, friends and family are their only option. So, if you decide to ultimately go down this road, make sure your friends and family understand that this investment is very risky, and they should not invest the funds unless they are prepared to lose 100% of their investment.
Individual Angel Investors
Individual investors on the other hand, don’t know you at all. Angel investors won’t just write a check and walk away. They’ll own a part of your company, and will likely want a say in major decisions, and they’ll watch to see whether you listen to them. In order to succeed with your angel investor, you will need to find someone who understands your industry and business model, has experience in the field, and can bring value to your company. Sometimes, angel investors prefer to stay anonymous. Other times, you may be able to identify angel investors, and try to figure out if you have a mutual connection that can credibly make an introduction for you. If you can’t seem to find a personal connection with investors Angel List and MicroVentures are good resources that can help you find finding angels in your region and industry, includes about 25,000 investors. Moreover, a search of the term “angel investor” on LinkedIn brought up over 35,000 profiles.
Industry associations, local trade groups or, in some states, business-incubator centers can help point to potential angels. New York incubators include: TechStars, NYU-Poly, Entrepreneurs Roundtable Accelerator, FinTech Innovation Lab, First Growth Network, DreamIt Ventures, Founder’s Institute, General Assembly, and NYC Seed. These incubators/accelerators are meant to foster networking among entrepreneurs, but many operate on a virtual basis as well. If you’re interested in finding an incubator in your state, visit the National Business Incubation Association’s website.
Angel Investor Groups
According to the Angel Capital Association (ACA), there are nearly 250 angel groups in the United States. Some angel groups are set up as funds and others as more loosely structured networks, but because they are organized groups, most of them have websites to submit funding requests to them. In fact, the ACA conveniently provides a directory that lists most American-based angel groups on their website. These are networks aggregating angel investors. Angel investors often invest through groups or networks. Angel-investor groups are groups of local high-net-worth individuals interested in supporting startups. Beware that these groups may be difficult to find if you don’t live in a metropolitan area. Similar to the Angel List platform, Gust and Angel Capital Association can help you find angel investor groups. New York Angel Investor groups include: New York Angels, 37 Angels, Empire Angels, Golden Seeds, Tri State Ventures, and ARC Angel Fund. These groups provide due diligence, extra research, and access to potential deals and shared expertise that someone operating alone probably doesn’t have. So, instead of an individual angel investing $100,000 by themselves, 20 angels aggregate $1 million and invest as a group in the deals they like the best. Another positive is that it is much easier for you to raise capital with one phone call, instead of calling investors individually.
Every successful start-up begins with an initial investment. Family and friends are a good option for the beginning processes of your start-up, however it comes with the risk of spoiled familial connection and a lack of professional business help. Angel investors, on the other hand, come with experience in the business and tech field and can impart wisdom from their past businesses in order to help you succeed. To be on the safer side of your newly forming business, angel investors are the way to go.