Are you an entrepreneur with a game-changing business idea, but no working capital to get it off the ground? Maybe you’ve self-financed preliminary activities, like market research, product research and development, and business plan development, and now you’re looking for investment. Before you start knocking down the door of venture capitalists, it might be worth considering an angel investor.
What is an angel investor?
An angel investor is a private lender that provides capital to startups or early stage companies, usually in exchange for ownership equity. Unlike venture capitalists, angel investors aren’t professional investors representing an external company – they invest their own money and resources. They’re known to provide more favourable terms than traditional lenders but, because of the high risk, also tend to give less money and invest earlier in the startup lifecycle.
While the Australian angel investment pool is still relatively small, high-profile success stories from the likes of Facebook, Uber, and WhatsApp have encouraged its growth. Still, finding an angel investor, and knowing what’s required to successfully woo one, can be challenging for first-time entrepreneurs without the right advice.
What do angels want?
Angels are not in the business of giving bailouts to struggling business, so, first and foremost, they want to see a return on their investment. An innovative business idea, technology, or intellectual property with strong growth potential doesn’t hurt either.
Other things angels care about are:
- Hard-working, ambitious, and passionate entrepreneurs willing to do the hard yards
- A logical business plan, clearly addressing the market opportunity, and early evidence of the idea’s potential success
- The viability of the idea and future investment
How to find an angel investor
The best way to find an angel investor is through an introduction from a colleague or friend. So, exhaust your networks for potential investors first, then network some more, and if you still lack contacts, research angel investor networks online. Ask any venture capitalists you know whether they can recommend angel groups that would be a good fit. And if you know any angel investors, ask them whether they know other investors you could meet to discuss opportunities.
Other ways to meet an angel investor are through:
- Other entrepreneurs
- Lawyers and accountants
- Funding platforms for startups, like AngelList
- Venture capitalists and investment bankers
- Crowdfunding sites, like Kickstarter and Pozible
How to prepare for a meeting with an angel investor
Angel investors are looking for more than just a great idea. If you do get to pitch your idea, most serious investors will expect:
- An elevator pitch – a clearly articulated, short sales pitch summarising your idea and value proposition
- A pitch deck or brief presentation giving your audience a quick overview of your business plan
- Mock-ups or prototypes of the proposed product or service
- User feedback or some form of validation from early adopters or existing customers
The financial projections are a critical part of your pitch, showing the scope of opportunity and potential return. Basically, an investor will want to see how their $1 investment will lead to a $1.30 return. So, make sure you’re prepared with accurate forecasts or existing reports, like your balance sheet, and profit and loss statement. Cloud-based accounting tools, such as QuickBooks Online, let you create and customise accurate financial reports, giving a potential investor a clear understanding of your business’s financial situation.
As with any attempt at raising capital, the clearer the picture – whether in the form of a business plan, an elevator pitch, or a pitch deck – the better your chance of success.
To read more articles about small business finance, check out these resources.