Ask any successful entrepreneur and they’ll tell you fundraising is one of the biggest challenges they’ve faced during their business journey.
The Right Way to Attract Angel Investors
They’ll also tell you that despite the hard work, it’s not impossible to convince an investor to fund your business. In fact, entrepreneurs are increasingly networking and pitching their business ideas to all types of investors to raise money.
Perhaps you’ve researched potential investment options and decided an angel investment makes sense for your business. But how do you attract the right angel partner?
How do you find an angel investor who will bring value to your business and offer much-needed seed funding to help your business grow? If you’ve set your sights on the angel investment route, here’s what you need to know:
Understanding Angel Investors
It’s not uncommon for entrepreneurs to be confused about who exactly angel investors are and how they differ from other types of investors—particularly venture capitalists.
While both funding options require you to give up equity or shares in your company, there are some important distinctions between angel investors and venture capitalists. Understanding some of these key differences can help you make a more well-informed decision.
An angel investor is an individual—often a high-net-worth business professional or successful business person—who uses their own money to provide financial backing to businesses they believe have growth potential.
On the other hand, venture capitalists use institutional money from various sources, ranging from pension funds to investment firms.
Another difference lies in the average amount of equity financing. Most angels provide
funds anywhere between $15,000 and $500,000, while venturing capitalists, on average, fund investments of $2 million and upwards.
The last key difference is that angel investors are much more likely to invest in startups that have growth potential, even if they haven’t gone to market or have sales to show traction.
Venture capitalists, on the other hand, invest in startups that have sales and steady growth. Their investments often need funding to continue expansion.
Business angels are valuable to startups because they offer business expertise, an abundance of networking opportunities, and experience and mentorship. Furthermore, angels tend to partner for the long haul, which could mean more funds down the line.
In fact, a 2019 Angel Funders Survey found that 50% of the total investment angel investors make are repeat investments across various business stages.
Another advantage is that you don’t have to pay back the invested funds in the event your business fails. Therefore, the risk involved is much less with this equity financing option compared to debt financing.
How Can You Attract the Right Business Angels?
Now that you understand who business angels are, it’s time you know how to position yourself so you can attract the right one in the early stages of your business. Here are five key tips:
Step 1: Determine If You’re Ready to Raise Money
Fundraising for your startup can be exciting, but it’s also a tiring process that can leave you frustrated if you don’t take the time to prepare. The biggest mistake you can make is to approach investors prematurely.
If you start fundraising too soon, you could burn bridges that could have helped you later down the road.
You need to be fully committed to the vision, have a strong team in place, and have a clear path to profitability as well. You also need to be clear about how much money you want to raise and how you’ll deploy the funds.
Suppose you’re not certain that your startup is at a stage where you can defend your capability to inject an ‘extra dollar’ into the business and generate additional revenue within a given period. In that case, you need to make more progress before you can approach investors.
Step 2: Create a Business Plan and Pitch Deck
While a strong and well-backed-up business plan demonstrates to angel investors that a business idea or startup will be profitable, a clear, compelling pitch deck is what captures attention. There’s no better way to persuade an investor than with a pitch deck and business plan on hand. Your business plan should include:
- An executive summary
- Company or Startup description
- Market research and analysis
- Organization and management team
- The products or services you intend to offer
- Pricing and sales information
- Competitive analysis
- Funding Request
- Team description
- Potential obstacles and how you’ll deal with them
- Financial projections
Your pitch deck, on the other hand, should include:
- This is your chance to introduce yourself and explain why you’re standing before the investors.
- Highlight at least two problems that your service or product is going to solve in the market.
- Demonstrate how your service or product will fill the gap in the market.
- Market Size and opportunity. This is where you show them the growth potential of the company.
- Product demonstration. Present your solution in action and demonstrate how it’s going to make money.
- Management Team. Introduce the entire team leading the company.
- Clearly outline your competition and why your startup or idea is different.
- Go-To-Market Plan. Highlight your customer acquisition plan.
- Traction/Milestones. This is where you discuss sales channels, revenue, and profitability.
- Financial information. Talk about what you need from the investors and why.
Not sure where to start with your business plan or pitch deck? You can find plenty of sample pitch decks and download a free sample business plan to get started.
Step 3: Know Your Numbers
Angel investors want to know that you’re invested in growing your company and understand the market like the back of your hand. Demonstrate your knowledge by studying every financial projection and market data graph you’ve collected.
Investors will want to know everything about where your business stands and where you plan to go, including your inventory levels, customer acquisition costs, projected revenue streams, projected profit margins, growth rate, and turnover rates.
These are some of the factors that will prove to them your company’s ability to handle its financial obligations. Keep in mind that it’s not enough to have a valuation figure for your company―you’ll need to demonstrate to investors how you arrived at your current valuation.
Step 4: Find the Right Investors
One of the most effective ways to find angel investors is through networking. Start by reaching out to your immediate network of friends, family, and colleagues. Attend industry events, conferences, and meetups where you can find these investors. Another option is to attend pitch contests.
These contests are frequented by investors and winners often score the opportunity to meet with an investor privately. Lastly, online platforms such as Gust, Angel Investor Network, LinkedIn, and AngelList are great resources for searching for the perfect angel investor.
Step 5: The Art of the Cold Email
Cold-emailing can be unpleasant and frustrating. A cold email has an average open rate of 15 percent to 25 percent, which means you won’t get an investor to open your email if you don’t lead with value. Each time you send an email, you need to think about how you’ll pique that particular investor’s interest.
The first thing you want to do is to learn the trends in an investor’s investment decisions. Research each potential investor, noting their typical investment size, industries they’re interested in and highlighting the commonalities between companies they’ve already invested in.
Avoid distractions and go straight to the point. Begin with a personalized introduction, noting why you chose to reach out to them and why you think your startup would be a great fit for their portfolio. Next, tell them what your startup is all about in a few sentences.
Consider including press mentions, your pitch deck, and key stats/case studies that support what you’re doing.
Finally, you should finish off your email with a great call to action aimed at setting up a one-on-one conversation with the investor.
Dave Lavinsky is an internationally renowned expert in the fields of business planning, capital raising, and new venture development.
He is the co-founder of Growthink, a business plan consulting firm that has helped over 1 million companies develop business plans to start and grow their companies and raise billions in growth capital. Check out Growthink reviews to learn more about the company.