- By SeedInvest
- March 23, 2022
- 12 minute read
Startups need funding to turn their business ideas into reality. If you are a founder in need of funding, angel investors can play a key role in getting you the capital you need for your startup. This post will explore:
- What angel investors are
- The pros and cons of finding angel investors
- The differences between angel investors and venture capitalists
- How to find the right angel investors
What Is an Angel Investor?
Angel investors are people who invest in startups with their own money, typically in exchange for ownership equity. Early stage startup investments are illiquid and risky, and angel investors are essentially betting on the company’s future success.
Due to this, most angel investors have to be “accredited.” The SEC defines an accredited investor as someone who:
- Has an individual net worth, or joint net worth with their spouse, exceeding $1 million (excluding the value of one’s primary residence).
- Has an income exceeding $200,000 (or $300,000 together with a spouse) in each of the past two years and expects the same this year.
- Holds in good standing a Series 7, 65, or 82 license.
- Is a professional investor.
Accredited angel investors may operate independently or as part of a syndicate. They may also source deals from their own networks or through platforms like AngelList.
Accredited angel investors are high net worth individuals, but they can come from a variety of backgrounds including:
- Operators at tech companies or professionals like doctors, lawyers, and accountants
- Current or former founders with insights on the startup journey
- Current or former C-level executives
- Current or former venture capitalists or professional investors
- People who are independently wealthy
Not all angel investors are accredited, however.
Equity crowdfunding platforms like SeedInvest enable retail investors–or those who don’t meet accreditation requirements–to participate in private company investing, opening up new networks for startups looking to raise capital.
Pros and Cons of Finding an Angel Investor
Startups considering an angel investor as a source of early stage funding should understand the pros and cons of that relationship, and the finer points of what it can entail.
Pros of Finding Angel Investors
First we’ll look at the potential upsides. Both accredited and retail angel investors can be valuable partners for your startup.
Typically, angel investors provide enough capital to further product development, invest in sales or marketing, and hire early employees, setting you up for your next funding round.May have valuable experience in your industry.
In some cases, angel investors choose the businesses they fund based on their experience in a particular industry. If that is the case with your angel investor, their knowledge could be a valuable resource you can leverage to benefit your startup. Depending on how seasoned they are, angel investors may be able to help guide your enterprise in the right direction for success and avoid potential pitfalls.May help you attract more investors.
Money attracts money, so angel investors are often connected to venture capitalists and other financial experts. They may be able to steer you in the right direction to find other investors interested in joining a subsequent funding round.
Cons of Finding Angel Investors
Taking on an angel investor isn’t without its potential downsides, and you should do your homework ahead of time to ensure you understand all the ramifications of accepting funding from angel investors.
Angel investors make investments as business decisions and may ask for more equity or influence than you are willing to give in exchange for their investment. Perhaps they want a larger share of the company than you are comfortable with giving up. Maybe they’ll want a larger say in how the business will be run than you initially envisioned.Require time, connections, and resources to find.
It can take quite a bit of time, effort, and resources to find individual angel investors. Your company or product may not have several weeks or months to spare networking with wealthy individuals willing to invest. Many startup founders are in the position of putting all their time and resources into product development and have little to allocate for finding interested investors.May lack useful industry experience.
While some angel investors may have experience in your industry, it’s not guaranteed. Sometimes investors simply want to invest, even when it doesn’t align with their interests and expertise. While it may be tempting to take funds from whoever’s offering, working with an angel investor with no knowledge of your industry means that you will not have a cushion of experience on which to lean. In addition, angel investors may not have deep VC connections to assist you in future raises and will likely have limited understanding of how to structure your deal.
Angel Investors vs. Venture Capitalists: What’s the Difference?
Angel investors and venture capitalists seem similar in that they both provide funds for your business. However, there are some key differences between individual investors and those that deploy institutional capital. These include:The amount of funding offered
Angel investors typically offer less in funding than venture capitalists. According to Crunchbase, the average investment from an angel investor is $25,000 to $100,000. By contrast, a venture capitalist may invest millions of dollars, though this depends on the startup stage and type of funding round. For example, Crunchbase data reveals that VC firms may provide:
- Between $10K and $2M in seed rounds, though larger seed rounds are becoming more common
- Between $1M and $30M in Series A and B rounds, on average
- $10M+ in Series C rounds
Angel investors typically use their own money to fund businesses, which can come from any number of sources. Venture capitalists, on the other hand, are professional investors. Their funding comes from LPs (limited partners). These LPs can include:
- Pension funds
- Foundations or family offices
Angel investors typically invest in early-stage companies, but venture capitalists are more likely to invest in both early-stage companies and those in later stages, depending on the VC firm’s focus.The amount of due diligence done
Though it varies by individual, angel investors typically do not always perform as much due diligence as venture capitalists. This is likely because they are investing their own funds and do not have a fiduciary responsibility to partners like venture capitalists do.Expected return
Angel investors often act as mentors for a startup, but want little involvement in the decision-making for the business. Venture capitalists, on the other hand, generally want a higher level of involvement, even potentially requesting a seat on the Board of Directors.
How to Find the Right Angel Investor
Entering into a relationship with an angel investor can alter your company’s entire trajectory, so it’s not a decision to be made lightly. Before you sign anything, it’s essential to establish a fundraising plan for your company and consider the following steps:
1) Build a fundraising strategy.
Having a solid fundraising plan helps you to establish a strong campaign. This is a multi-step process that includes significant research, seeking wisdom from smart advisors, organizing documentation and data, building strong networks, campaigning, and negotiating. Alejandro Cremades, serial entrepreneur and best-selling author of The Art of Startup Fundraising, offers these tips for building your fundraising strategy:
- Start early: It can take months to prepare your materials and build the right relationships. Cremades advises nurturing investor relationships at least a year in advance.
- Be open-minded and coachable: Being flexible about how you will get to your vision is essential, as there are many methods of funding you may need to consider.
- Mentally prepare for ups and downs: Cremades estimates that founders can encounter 400 investor turn downs and multiple meetings with negative feedback before finding funding. Understanding that rejection is part of the process can help you stay the course rather than give in to discouragement.
- Allow enough time for fundraising: In early stages, founders may spend half their time working on fundraising. Being aware of this upfront can help you schedule your time wisely and avoid burnout and stress.
- Surround yourself with smart advisors: Remember that your raw talent combined with the experience of seasoned advisors becomes an entrepreneurial super power. Advisors can help you figure out what you don’t know and fill in gaps that you may not even have considered.
- Connect with connectors: Connect with people or fundraising platforms that can connect you with the right people to invest in your startup. Warm introductions or recommendations can go a long way toward easing the fundraising process.
- Learn everything you can about fundraising: Knowledge is power. The more you can learn about how fundraising works, the better able you will be to present yourself as knowledgeable and competent.
2) Craft your pitch, clarify your story, and get ready to sell.
An idea is only as good as its pitch. You might have an idea for a top-selling product that could change the world as we know it. Unfortunately, if you do a poor job pitching it, nobody will ever be interested.
Crafting the right pitch can be a crucial step in attracting angel investors. You’ll want to have a clear story behind your product and be able to sell with ease. Some of the things you’ll want to include in the pitch and story behind your product are:
- How your investors can earn potential returns. This is not just a few bucks here and there, but rather how they can make money with your product over a five to ten-year span.
- The strength of your team. It’s not likely you’ll be able to get your product far just through your own efforts. Angel investors will take you more seriously knowing there is a whole staff or team behind your product that can push it in the right direction.
- How to add value beyond capital. Angel investors may want to be sure they can bring value to the table in ways other than money. If you can provide them with opportunities to mentor, lead, or network with others, this might help seal the deal.
- Potential for growth and scalability. Angel investors want to know that your product is going to grow beyond its initial stages by solving a specific problem. In the pitch and story of your project, be sure to discuss what issues your product can tackle. If you can include a demonstration, even better. Words can only go so far, but showing your investors what the product can actually do means much more.
Networking is a critical part of the fundraising process. Tap into your existing circle, or branch out through targeted introductions. Attend pitch competitions and join accelerators to share your story with a larger audience. Don’t hesitate to ask people you know for help and join virtual or local communities to build new relationships. Referrals go a long way.
4) Decide what you are prepared to offer to investors.
Be realistic about the valuation of your startup. Structure your terms based on that reality and what you are willing to give investors in exchange for their money. What incentives can you offer?
While sticking to your guns is important, flexibility and negotiation can make for an easier path to funds. Experienced entrepreneurs know when to give a little to gain a lot.
If an investor approaches you with what appears to be an untenable offer, consider the option before giving a flat-out “no.” Whatever they’re suggesting could be an unexpected key to getting your business up and running.
Find Diverse Angel Investors on SeedInvest
SeedInvest makes finding independent investors easier. We are a leading equity crowdfunding platform that helps founders raise money online and each startup applying through us goes through a rigorous vetting process before being listed.
Accepted startups can access a community of more than 640,000 investors, including over 85,000 accredited investors consisting of family offices, institutions, and more.
SeedInvest has helped startup founders raise more than $400 million for their companies from more than half a million investors. Our firm prides itself on being direct, approachable, and simple. Sign up to start your raise today.
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- Past performance is no guarantee of future results. In addition, SeedInvest's due diligence process is no guarantee of success or future results. All investors should carefully review each investment opportunity and cancel their subscription within the allotted time-frame if they do not feel comfortable making any specific investment based on their own DD. Learn more about due diligence on the SeedInvest Blog and our vetting process in our FAQs.
- All securities-related activity is conducted by SI Securities, LLC dba SeedInvest, an affiliate of Circle Internet Financial, and a registered broker-dealer, and member FINRA/SIPC.