Angel investors are wealthy groups or individuals who fly in from heaven, or somewhere else, and give money to promising business startups in the hopes of getting huge capital gains down the line. The main goal is to find a company that has what it takes to become the next big thing, and then to help them on their way by offering money, expertise and connections in return for equity. When the company goes big this equity multiplies in value, making a big return on investment for all involved.
With established industries being disrupted left, right and centre, it’s been said that there has never been a better time to look for an angel investor who can help you get your company past its tipping point.
Read this guide to find out what angels are looking for in a startup, which industries they most prefer, how to make a good presentation and why Shark Tank is one of the greatest resources you have.
Which industries attract angel investors?
Venture capital is about making big returns, and angel investors correspondingly tend to prefer a few particular industries.
- Software. Investor-friendly startups have a plan for immense growth and a scalable business model. The software industry is good for this and tends to attract many investors. Software as a solution (SaaS) development companies and other proprietary software developers are widely considered by angel investors. Software is, by a large margin, currently the most invested-in industry.
- Technology. This is another very big area for investors, particularly in biotechnology, information technology, financial technology and networking systems. These take many critical roles and are also heavily invested in.
- Mass market consumer goods. Companies with a viable product that has the potential to become a household item often benefit from venture capital investments.
- Equipment and specialist products. These products often have distinct requirements, and it can be clear when one is simply better than its predecessor. This can make these products a relatively safe option for angel investors who want a return on their capital.
If you are in one of these industries then your odds of attracting investment might be better, but that doesn’t mean it’s easy. Correspondingly, being in other industries might make getting investment more difficult, but that doesn’t mean it’s impossible.
In all cases there are a few crucial things you can do both before and during your fundraising to attract potential investors.
What makes angel investors different?
- They focus on high risk, very high return investments in emerging companies. Only one in ten startups succeed and angel investors know it.
- They offer benefits such as expertise, logistical support and business networks as well as financing.
- They are often looking for qualities such as dedication, passion and commitment alongside traditional profitability metrics.
- Angel investing is a common second-round of financing for high-growth startups, coming after seed funding but before formal venture capital financing.
How to woo an angel investor
Before you set about attracting investors, make sure you’re ready to put your best foot forward. Just like going on a first date, making a bad impression means you probably won’t get a second chance. Before you even start soliciting investors, make sure you’ve done the following:
Establish profitability, both actual and potential
You will need to convince angels that you can turn their money into even more money. To do this you need to convince them that the product or service offered by your company is able to make it happen. It must not only be profitable, but also in demand.
- You should know the cost and profit of each product or service offered.
- Have a realistic growth plan for attracting and retaining customers.
- Ideally, your product or service will fill a unique and real need, or it will be objectively better than the nearest competitor. This will help you demonstrate its viability and profitability.
Can your brand go worldwide, or will it always be focused in Australia? Will your customers keep buying more, or will they only ever buy once? An investor will want to know about this before deciding whether or not to get involved.
- Some angel investors might only be interested in brands with global potential, while others might be more open to smaller opportunities.
- Investors may be wary of companies that aim to compete with established big name brands.
- Identify your customers’ needs and focus on how your product or service fits them. Being able to clearly demonstrate how your product can fulfill customer needs at every step can make it a more attractive investment option.
- Identify your target audience. Is your product for men, women or children? Is it fun, educational or exciting? Is it for kids or grownups? Investors might be looking for something in particular like educational products for children. You should know exactly who your buyers are.
The facts and figures are the evidence you need to convince investors to jump aboard. Angel investors are keen on seeing determination and passion, but only if it comes with the right numbers.
- Income, expenditure, number of customers, prices, number of staff and everything else. Most potential investors will want to know all about these, and not having the answers will typically put them right off.
- Both having the information and using it to make key business decisions clearly demonstrates an ability to manage your company dynamically and a desire to succeed. Angel investors are investing in you as well as your company, so it’s important to be able to actively demonstrate your competence.
Know what kind of deal you want
When an investor offers you money they’re offering you a deal. Remember that you are under no obligation to accept it, and that not every deal will be right for your company. They will typically want equity in exchange for financing, and/or may include repayable debt schemes or similar.
- Establish the minimum amount of money you need from investors. This should be the smallest possible amount that can help your business achieve its stated development goals. You should generally decline any amount less than this, or try to negotiate for more.
- Decide how much equity you are willing to part with. Do you know what you would do if a potential investor offered all the money you need in exchange for a 50% share of the company? Giving away equity can be fraught, because it might someday be worth billions. Decide how much you are willing to part with, but don’t get too ambitious and try to remain flexible. Remember that that a 10% stake in a successful company is worth more than 90% of a failing brand.
Five signs that your business is ready for an angel
If your company ticks these five boxes, then it’s a good candidate for angel investors.
- It has outsized growth, or more than it can continuously sustain. Bank lenders are often uncomfortable with outsized growth, while angel investors, on the other hand, often view it as a good sign that a company is quickly on the way to multiplying in value.
- It has an established strategy for the coming years. A brand with a solid, concrete plan for the coming years is a more reliable investment. A strategic vision is essential to achieving the success an angel investor hopes for, and not having a developed expansion plan is a deal-breaker.
- It has a scalable business model with global potential. If your business has the potential to expand around the world, and can do so without needing a complete overhaul from the ground up, then it has a global, scalable business model.
- It has strong management. Angel investors are investing in you as well as your company. They want to see strong management that is committed to the brand’s success, creativity to solve problems and someone they can work alongside with, or at least entrust with large sums of money.
- It has a unique product, technology or angle. What makes your company different? A unique product or technology will set you apart, while a unique focus can also show that your company has what it takes to go big. Being able to identify and enumerate the things that make your company unique can help you acquire investment.
From the tank to the bank
Jennifer Holland’s fifteen-month-old had a sore throat when she visited her GP. With a light in one hand and a tongue depressor in the other, the doctor asked her to restrain her child while they take a look. There was a moment of bafflement as Holland wondered why they didn't simply use light-up tongue depressors, and a second when a quick Google search revealed that such a thing didn’t yet exist in a cost-effective package.
Throat Scope was born a month later, as the world’s newest manufacturer of cost-effective, patented light-up tongue depressors with disposable wooden blades. Not long after that Holland found herself on Shark Tank, making her case for investment in front of several angels.
It was a unique product with global potential, produced by a well-managed company with a clear vision. Holland walked out of that session with a $76,000 investment, while her angel got a 30% stake in the company and a deal for 5% of the royalties until that money was paid back.
However, Holland also got some valuable business advice. Taking a close interest, Holland’s investor urged her to take on more people. With that $76,000 she hired a corporate director and a commercialisation director. The former raised even more capital, while the latter inked a number of worldwide distribution deals. All of a sudden, Throat Scope was ready to go global.
Holland’s angel investor provided $76,000, but the advice he gave her turned out to be just as important. Meanwhile, Jennifer had to give up 30% of her equity pie, but because she did so the pie itself got a lot bigger. With both the angel and the business owner doing their part, everyone wins.
How to find an angel investor
Finding an angel investor can be difficult, and competition for their attention can be fierce. There are, however, some ways to get their attention. Angels can be both individuals and groups, but both can be found in similar ways.
- Angel organisations. There are a number of different angel business groups. These are networks of individuals that pool funds together to invest in promising companies, and they’re one of your most promising options for locating an angel. There are both nonprofit and for-profit angel groups, and many have different focuses. Pitching your business to an angel network is a good way of speaking to many individual investors at once.
- Networking. Building business networks and having someone put in a good word for you can help immensely. Having a business with potential, and then knowing someone who can personally recommend it to an investor is significant advantage.
- Going on Shark Tank, or crowdfunding. These are less conventional options, but can still be just as effective. What you see on Shark Tank is broadly similar to what you get in typical investor pitches, and the publicity can definitely help a growing company. Crowdfunding, meanwhile, can raise a lot of money, particularly if you have a genuinely good product idea that people actually need.
Not sure whether an angel investor is right for your business? Explore your other startup investment options.