Angel investors are always on the lookout for promising startups with the potential to generate high future returns. For these investors, with high risk comes high rewards. In contrast to institutional investors, it’s their own money they’re putting on the line, which means they’re more likely to invest in a more personal relationship with the company founders. With angel investors, you’re not just signing up for investment, and you might also be lucky enough to land yourself an experienced advisor.
Know who you’re looking for
It’s vital that you’re really clear about what type of angel investor your business needs. Some companies may just need the money and little else, in which case they prefer “silent” investors. Others will also be looking for a mentor who can walk them through the startup process, step by step. Some investors have strong industry connections, while others have a specific area of industry (e.g. Fintech) or subject expertise, such as marketing.
One of the most important aspects to consider when searching for an angel investor is personal fit and chemistry as well as alignment of visions.
If you find yourself with the wrong investor on board, this might spell trouble further down the line. A common misconception among entrepreneurs is that the “investor chooses the entrepreneur.” Just because you are lucky enough to have found an individual who’s ready to invest in your venture, doesn’t mean you should accept straight away. In fact, investor due diligence goes both ways and you always ensure there’s both strong chemistry and the investor shares the same vision of the future that you have outlined in your business plan.
With that out of the way, all investors will look at the potential economic outcome of an investment opportunity. To protect their investment and to ensure the company stays aligned with its goals, some investors will want to have more of an input in the direction of a company than others. This usually involves taking up a board role and overseeing the company’s direction and performance, often in a ‘non-exec’ capacity.
More often than not, some angel investors will want to have certain “rights” over other investors putting in less money. For example, you can incentivize larger investors by offering them a different “class” of shares which might give them certain rights in the company, such as voting rights. So when you submit your business plan, you’ll need to make sure you’ve a well-prepared term sheet for investors so that they know what deal they’re getting. Not only is this a good tool to attract investors, but you’ll also come across as smart, savvy, and well prepared - something that investors always like.
Where to find angel investors
Angel investors vary in terms of their investment objectives, preferred industry, and level of participation. They may be someone you already know in your personal life or they could be a complete stranger that you come across through an online angel investing platform.
Here are some of the more common ways to find such an investor:
Friends and family
Some of your friends or family members may be financially secure and have some disposable income to invest in a promising new project. Others may invest just because of the trust they have in you - this is usually more of an emotional investment decision. They may have a background in business or the industry you are in, but this is usually not the case. With friends and family, be aware that money has the potential to change personal relationships. People may start questioning why you’re using their money in a certain way and may try to get their money back or propose unfair terms.
You should always treat friends and family investors in exactly the same way as you would deal with other investors.
Make sure they’re in receipt of your standard investment risk statements, and that they also comply with any additional investor self-certification documentation that might be applicable in your jurisdiction. You’re not only doing this to protect them but also yourself. The investors will want to know that everyone has signed up to the same deal, that you’re exercising your fiduciary responsibilities if they are to become stockholders and that you are acting as a professional running a company, and that you’ve made no exceptions.
When you’re first starting out, raising funds through friends and family can be a good avenue, given that they know you and they might be willing to take that additional risk. In reality, most relationships with friends and family investors do not change for the worse as it is in the founder's interest to make sure that these relationships are preserved.
Individual angel investors
On the surface, it may appear that any person who has sufficient net worth would be an ideal angel investor. As outlined earlier, sometimes this just isn’t the case. High net worth, “sophisticated” investors are always the best angel investors to approach since they’re already fully aware of the potential risks. A high net worth individual who isn’t a “sophisticated” investor may have very little awareness of the risks, formalities, and legalities of angel investing, and could end up getting very upset at losing their money if things don’t go to plan.
On the other hand, some sophisticated angel investors might not know what they’re doing but are happy to invest just in order to be “along for the ride” in an exciting new venture with a promising technology. Don’t be fooled. Just because an investor is “silent,” it doesn’t mean that they don’t know what they’re doing. Be assured that almost all sophisticated investors will carry out thorough due diligence and they’ll still be looking at getting a return on their investment. So it’s wise to continuously keep them engaged with all your usual updates as your company grows.
Angel investor networks
Online angel investor networks have become very popular over the past ten years, making it easier for high-net-worth individuals to selectively invest in different companies, either on an individual basis or as part of a syndicate. Angel investor networks will have their own “entry criteria” for investors, based on proven ability to invest, minimum investment requirements, etc.
You’ll stand a much higher chance of working with “genuine” investors who won’t waste your time. That said, getting in front of them can be a highly-competitive process, so you need to make sure your pitch is slick and stands out.
The best way to find one of these groups is by searching AngelList for groups of investors in your area or searching for “angel group in [your city]”. If your local area is lacking in one of these groups, you might need to cast your search net wider.
Certain online platforms connect angel investors with startups. AngelList allows accredited investors to easily find relevant startup investing opportunities. It’s an ideal venue for companies to find new talent, generate exposure and most of all obtain funding. Startups have much more visibility this way if they want to get an angel investor on board.
Republic is another great platform that allows startups to raise money from all types of people, not just accredited investors. It makes it a lot easier to find angel investors for a startup simply by applying online.
At Republic, we believe that angel investing should not be the exclusive reserve of a few high-net-worth individuals with some disposable income to invest. Republic democratizes investing by allowing just about anyone to invest in startups by lowering the minimum threshold required to invest. We make it a simple and efficient process from start to finish.
Republic has built up an impressive reputation in the startup investing sector and is always looking at ways to improve. We also encourage diversity and mission-driven startups. That’s why we encourage all startups to take an in-depth look at the advantages of working with Republic.
- What is the difference between angel investors and venture capitalists?
An angel investor is an individual (or a group of individuals) who's willing to put his/her own money on the line, typically by investing during the earlier phases of a startup. This is in contrast to venture capital firms or VCs. VCs are institutions with the business objective of deploying institutional funds (other people’s funds) to make strategic investments, typically at a later stage in a startup’s lifecycle once significant traction has been demonstrated.
- How do I know if my business is right for an angel investor?
If you’re looking to raise funds and you would also like a mentor to help you along the way, some (but not all) angel investors can fit this role. If you manage to get somebody on board who can help you avoid the typical major hurdles facing startups, the personal chemistry is right, and your visions are aligned, then this is your ideal scenario. However, this type of angel investor is usually the exception and not the rule.
Many startups will often struggle to obtain funding from other sources and angel investing is often regarded as an ideal way for the entrepreneur to take their business to the next level. Invariably, startups are all about survival, and angel investors can provide an extremely valuable lifeline at a critical stage in the company's growth. Be aware though that for this level of risk, angel investors often ask for a higher stake in the company, so make sure your valuations are realistic and attractive.
- How do I know if the angel investor is right for me?
Angel investing is a two-way partnership that lasts for at least five years, and the founder needs to be certain that there’ll be a good fit with an investor. Chemistry, similar values, and having a shared vision are all key attributes to look for. Otherwise, you may want to keep looking at other options if possible. Remember, the entrepreneur chooses the investor too.
- What criteria do angel groups use to select entrepreneurs?
Angel groups need good reasons to invest and a potentially large return is always the key driver of any investment. A business needs to be properly structured for investment, have a solid and realistic business plan, present a realistic valuation, and articulate a clear exit strategy. Some angel groups will only focus on certain industries, technologies, or geographies.
Remember also that people buy people! Investors always want a strong leadership team that is emotionally vested in the business, is working full-time on it and has made demonstrable sacrifices along the way. Trust, transparency, clear communication, and a work ethic among the team members is key. In today’s competitive environment, founders must also be up to date with ethical and fiduciary responsibilities as senior executives. While startups, by nature, are under-resourced, angel investors like to at least see that a company has the essential personnel in place to drive the company forward. These are commonly referred to as the “Hipster” (the designer or creative genius), the “Hacker” (the product guru), and the “Hustler” (the person who packages it all up and takes it to the masses).
- Why are Republic investors called angels?
At Republic, we believe that investing is a right, not a privilege. Investing should not be the exclusive reserve of a small group of high-net worth individuals, but for everybody, no matter what their level of disposable income is. That’s why we believe in “smart money - at scale.” By giving everybody the opportunity to invest in your company, you not only stand a higher chance of closing your round, but you also increase your company’s chances of success through a deeper pool of smart investors whose knowledge you can call on when you might need it. This is what we call “social capital”, because you’re tapping into four key areas: expertise, networks, targeted demographic profiles and of course strong validation in terms of your product reviews.
For this reason, we don’t make any distinction between a traditional high net worth investor and an investor on Republic. That's why we call everybody “angel investors”.
As you can see, there are many categories of angel investors and many ways of finding and attracting them. In the same way, every startup is different with its own unique set of requirements and preferences. Going forward, taking the time to figure out your exact needs is a vital step in ensuring you gain a clear idea of what type of angel investor you will ultimately choose to work with, and where to find them.
This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected.