How to find angel investors is a crucial question for many entrepreneurs and small business owners today. Discovering these opportunities can mean takeoff and future growth.
Here you'll discover how to find angel investors, and how doing this can help your business. Plus, you'll understand how these investors profit from loaning money to growing enterprises.
What is an angel investor?
Angels investors are individuals and groups that finance small businesses through their private resources.
They can choose who to work with and don't mind working with small business owners such as startup companies that don't need significant cash. However, many angel investors work with businesses at any stage of growth.
Commonly, angel investors are important business owners that share their expertise and nurture business owners new to the industry. They have a vested interest in the capital they provide to ensure future success for themselves and the borrower.
Why are investors important for a small business?
An angel investor is similar to a first responder in an emergency. They are financial experts who know how to use the finances you have.
Business investors work with a network of strategic partners such as banks, venture capital firms, lawyers, accounting professionals, and investment bankers..
Many are experts in a specific business area and can provide excellent advice about how to compete in your industry and know proven strategies to make a profit
Because they network with a wide range of professionals, angel investment can help you to know how to reach potential customers, hire the right employees, and build your brand to gain recognition in the marketplace.
You don't have a fixed monthly repayment over months or years since investors receive a percentage of equity in your business in exchange for angel financing.
Is angel investing a good idea?
Partnering with an angel investor means they assume the financial risk and are investment experts.
If you want to reduce the strain on your finances and grow your business, an angel investor might be good. Also, angel investors have a wealth of knowledge to guide and advise you on how to run your business.
Angel investors have a vested interest in your business, and therefore their high expectations may cause friction. They want to make a profit as you do to realize a return on their investment.
You hand over a portion of your business's equity to the investor in exchange for cash.
Potentially, an investor could pocket 20% to 40% of your business's profit. It may be hard to see a large portion of your earn-earned money go to someone else.
So if you want to be the sole proprietor, they won’t be a good fit for you. Additionally, an angel investment doesn't build credit as many loans do.
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How does angel investing work?
Some people refer to these investors as "business angels" and "angels" because they provide capital to business owners that don't have access to other avenues of financing.
Angel investors seem like a lifeline when all you may have is a business plan and nothing else.
In angel investing, investors take on personal financial risk if they see a business's potential to succeed.
Risk for the angel investor is the possibility that the company will fail and they won't get a return on their investment.
Investors can provide capital in early stage startups where a business has not generated sales but needs the money to research or develop a line of products or services.
They work closely with business owners to develop strategies or identify target areas in the market to distribute products and services.
Angel investors can make a one-time investment or provide ongoing contributions as the business grows.
There's a trade-off for the investor for providing capital. For example, they may receive shares to convert to equity later on or a percentage of the business's total net worth.
What makes a good angel investor?
To know how to find angel investors, you must realize they are financial partners. Therefore, you need to ensure that the person you choose is the right fit for your company.
The person should have extensive experience in your business industry. That way, you work with someone who has a wealth of knowledge to draw from, whether you're a startup or an established business.
You want an angel investor with a proven track record of investing successfully. Partnering with a rookie investor is probably not the way to go.
Right angel investors should have a high net worth. In other words, they're financially stable and not stressed about their finances.
A potential angel investor candidate should be willing to provide references relating to their previous investments
. In addition, they should be someone that understands and shares your passion for your business idea and goals.
Pros and cons of angel investing
- Angel investors provide financing and nearly all the know-how to run a business so it succeeds. They want to see the money they provide put to the best use so everyone benefits.
- Essentially, you have a personal business coach to help you make decisions you've never made.
- As your financing needs change, they may be willing to make future investments into your business.
- Angel investors don't invest in too risky businesses, which would equate to a small return on their investment.
- The time it takes to receive financing may be longer than you expected.
- Angel investors take their time to decide which businesses to invest in and review legal documents in depth before deciding.
- To attract angel investors, you should know that they require that the debt they acquire be convertible into capital, which can be as high as 20% or more. Negotiations can take time as both parties want to get the best deal.
- Angel investors may pressure business owners if they don't see exponential growth, causing a power struggle between investors and owners.
Terms for angel investors
Here are the things angel investors usually consider or ask for before investing in your business:
- You have plans to scale up the business to a different level in 12 months with a distinct goal to make a profit.
- The product or service's growth potential in the market or its current traction (revenue history that supports sustainable growth).
- Likelihood of an owner's business plan becoming a reality.
- If you have the technology to promote and operate a business.
- A convincing business owner's pitch to the angel investor includes an accurate valuation of the business's worth.
- Prototypes of the business's product or service.
- Feasibility of additional financing opportunities based on potential progress.
- How you will use the raising capital and market products or services.
- Minimum capital a business owner needs and do they have equity to offer.
- Viable exit strategies to maximize an investor's return on investment.
They'll also expect you to have:
- Long-term passion and commitment to business goals are as important as who owns the business and the team of experts to take the company from A to Z.
- Understanding how finances work relates to how to grow revenue, business expenses, gross margin, and the importance of having lifetime customers.
What investors expect in return
Investors want to see a business grow steadily and realize a return on their investment within 5 to 7 years.
Most want to participate in the industry and become active angel investors for your business.
Common percentages angel investors want
Angel investors consider an excellent IRR (internal rate of return) of at least 22%, although the percentage can be from 20% to 40%.
Another factor they consider is the length of time for the investment and average market inflation. For example, a 5-year investment is better than a 10-year one.
How to get investors for your business?
Along the way about how to find angel investors for your business, you can consider the following tips to prepare for your search.
- Make sure your business is in the best position to connect with investors
- Look for investors. Do it through angel investment networks to find them, obtain references or look for their conditions
- Build a relationship with investors before asking for money
- Hone in on the right angel investor that best fits your needs and business
- Work on your business pitch or presentation
Tips to get the right investors
When learning how to find angel investors, know that serious investors look for business owners committed to the process.
That means having your legal documents in order, knowing where you want to take your business, and preparing a PowerPoint presentation or an executive summary.
It's your responsibility to partner with the right angel investors. You do that by looking for accredited investors with a minimum annual income of $200,000 and $1 million in assets and choosing someone with experience in your industry.
When you meet with a potential investor, ask them to go over their areas of expertise. Make sure to find out if you need them as a silent partner or someone actively involved in your business's day-to-day operations.
One of the most critical aspects about how to find angel investors is to be transparent about your business's finances.
Lay everything out of the table, so to speak, to avoid future misunderstandings and increase your chance for an investor to consider investing seriously.
What to ask potential investors
In this process of how to find angel investors, once you have managed to contact one of them, you can ask them some of these questions to help you give better clarity about them.
- Would you provide a list of entrepreneurs you have worked with?
- On what level will you be in my company?
- Are you interested in making future investments?
- Do you work with and recommend venture capitalists when my company grows?
- What main concerns do you have about my business?
- Do you schedule regular meetings with business owners you invest in? If so, for what reasons?
- How could you help with a business issue (tell them a specific problem)?
- Do you have a dollar amount you're willing to invest in my company?
- How long does it take for my company to receive funding, and are you the only investor, or are there co-investors?
- What agreements do you require I sign to invest?
How do you negotiate with angel investors?
You need the right person in mind if you hope for success; someone who will be supportive of what's going on behind the scenes.
Before you ever meet with an investor, you should already know the investor's financial background. In addition, they should have a proven history of helping business owners make a profit.
The investor should trust you. They need to see you as competent, reliable, and consistent. Creating and delivering an excellent presentation makes a good first impression and allows for more fluent negotiations.
From the very beginning, be transparent when you ask or answer questions leaving no gray areas for misunderstandings.
View the negotiation process as two professionals finding a middle ground so your business succeeds.
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Where to find investors
How to find angel investors for your small business
is easier when you know who to contact.
People in your community, such as lawyers, accountants, business owners, retired executives, and other professionals, may personally know some possible future investors for your business.
It's more economical for an investor to partner with a business near where they live when they prefer being an active participant or possibly plan to become a co-owner.
You can search for angel investors online using resources like the Angel Capital Association, AngelList, Gust, Angel Forum, and others to locate angel investors who want to connect with business owners.
Likewise, friends and family members that want you to succeed may be willing to invest in your business.
When dealing with friends and family, create a written agreement spelling out the details of the financial arrangement.
How can an angel network help you?
Investment networks help business owners connect with investors for one primary purpose—to help everyone succeed.
In many instances, investors pool funds collectively to optimize how they manage funds and become more efficient.
When networking in your community, you can get leads about investors someone has partnered with successfully and have a past or existing working relationship.
When using an online angel investment network, a business owner can create a business profile available for thousands of investors to consider. Then, with more investors to choose from, an angel network can recommend specific individuals or portfolio companies as the most likely candidates.
In the long run, networking speeds up the investment process and helps business owners and investors establish relationships quicker.
How to keep track of your interactions with angel investors?
You can network with other business owners already partnering with angel investors to get leads or start your own file of potential backers.
But, trying to find the right angel investor is time-consuming.
Keep a spreadsheet or use customer relations management (CRM) software to track conversations you have with angel investors.
Take detailed notes about the angel's experience, what industry they're experts in, and how much money they currently fund with other business owners.
Ask angel investors about their investment timeline, why they're interested in your company if they want to be a board director, and other questions.
The more information you have to log into your information tracking system, the better. You will use the data you gathered to compare angel investors and choose the one most suitable for your business.
As you build a portfolio of interactions with angel investors, you'll become skillful at knowing which investors to pass on and which to pursue.
Other options to get money for your small business
Personal and business loans
are available from banks and credit unions, or you can get money with business credit cards, merchant cash advances, invoice factoring, and a business line of credit
Alternative online lenders like Camino Financial can provide funding
within two business days, don't require collateral, and have fewer requirements than traditional banks and other online lenders.
Even better yet, with us, you can apply with SSN or ITIN, and we accept applicants with no previous credit history.
Grants are available
through the Small Business Administration, government agencies, state organizations, and private organizations. They are financial products that you don't need to pay back.
Crowdfunding for businesses
Individual people give small sums of money to help finance a business in return for rewards, such as the business's product or service or discounts. Other types of business
crowdfunding include equity and peer-to-peer lending
Crowdfunding can help build a customer base, test ideas, and get free publicity, but it usually isn't the right platform to raise large amounts of money.
Personal savings and retirement accounts
Entrepreneurs tap into their savings and 401 accounts or use money from a business emergency fund when starting a business.
Check with an accountant before taking withdrawals from a retirement account since you may owe taxes and penalties.
Homeowners can get a HELOC and pull out cash based on a percentage of their home's equity.
Owners consider it a loan and it includes closing costs and a lien on the property for the amount of outstanding debt.
Knowing how to get angel investors just got easier
Like any entrepreneur positioned for growth, you consider every financial avenue to acquire business financing.
Learn abot how to find angel investors might not be the right fit for everyone. Most of the time, a business loan is a much better alternative.
If that's your case, Camino Financial is ready to help you. Our requirements are more lenient
compared to other online lenders and financial institutions.
We're serious about helping businesses just starting or moving to the next level. We genuinely believe in our motto, "No Business Left Behind," as it's the guiding principle behind everything we do.
Don't hesitate to contact us and apply for a business loan. Our customer service representatives are financial professionals, who can match your business's specific loan type.
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