How To Get An Angel To Invest In Your Startup?
The term ‘Angel Investor’ dates back to the days of the first Broadway musicals. Then directors and producers sought funding from investors with an active interest in show business.
Angel Investors vs Venture Capitalists
Angel investors bridge the gap between the professional venture capital companies and the money offered by friends and family, also known informally by the acronym FFF – Friends, Family and Fools.
Venture capitalists play a very different role to an angel investor. An angel investor is often a cashed-out or semi-retired professional who is willing to invest their own money into a business startup. Typically they invest up to £500,000 a start-up requires to get off the ground. Venture capitalists usually invest in institutional funds required later in the business cycle, in the £500,000 to £1,000,000 range.
Research suggests that UK angel investors are investing more with each passing year. In fact, 41 per cent of investors reported that they had invested more in 2016 than in 2015, according to new research from the British Business Bank and the UK Business Angels Association (UKBAA).
Figure 1. The growth of UK angel investors
Smaller investment volume, however, doesn’t mean an angel investor is going to require any less persuasion than a professional venture capital company. In fact, as they are investing personal money and shouldering the brunt of the risk by themselves, angel investors have the reputation of requiring more convincing than venture capitalists.
The good news is that according to a report by Harvard University scientists William R. Kerr, Josh Lerner and Antoinette Schoar, there is strong evidence that startups funded by angel investors have a higher chance of success than those supported by venture capitalists. The report states that angel-funded firms are much more likely to survive the first few years and more likely to show better performance and growth.
While an angel Investor could be the best option for your startup, you still need to attract an Angel Investor in the first instance.
In terms of venture capitalists, data shows more than £804m was injected into UK companies in Q1 2017. Though the number of deals dropped by 10 per cent to 196, they were generally larger, later-stage deals. The biotech and life sciences sectors were particularly attractive to investors in the UK.
Startups can go wrong of course, and it happens quite a lot. Anyone who has spent any time in the startup and venture capital ecosystem will confirm this. By focusing all their attention on emphasising to their investors the successes they were achieving, and ignoring other shortcomings of the business, one startup created an impression with investors that they could not face reality and instead faced shutdown.
The right time to seek investment
The seemingly endless economic slump may lead us to think that now is probably not a good time to seek finance. Yet in spite of the world’s economic woes, there are still numerous angel Investors willing to invest their money in a promising startup.
According to EBAN, angel investment in Europe increased to €6.7 billion in 2016, a growth of 8.2 per cent from the previous year and remains the main backer of European start-ups. For comparison, angel investment in the US has reached an estimated $21.3 billion.
Does your idea have sufficient potential for an angel investor?
While the idea of a startup is more commonly associated with the technologically-based venture that has a high growth potential, a startup can be based on any product or service.
Paul Graham, the founder of one of the world’s leading startup accelerators Y Combinator, said: “The only essential thing is growth. Everything else we associate with startups follows from growth.”
Irrespective of the precise details of your idea, in order to attract an angel investor, you need to have all the information necessary to persuade them to invest in it.
What kind of entrepreneur are you?
According to David Amis, an author and experienced angel investor, everyone who approaches him falls into one of three categories. It’s important to identify your category as it will influence the angel’s decision to invest in your startup.
- Lifestyle Entrepreneur – you enjoy working for yourself in order to fuel your chosen lifestyle.
- The Empire Builder – it’s not about money, it’s about power.
- The Entrepreneurial Junkie – build a business, make it work, sell it, then start again.
*Davis Amis is a co-author of the invaluable guide: Winning Angels: The 7 Fundamentals of Early Stage Investing (Financial Times Prentice Hall, 2001).
Investment angels can fall into different categories from individuals to companies who bring together resources like Gabriel – a pool of female investors who help out fledgeling businesses from their Newcastle upon Tyne base in the UK. A North-East IT consultancy is now a global player thanks to vital funding from shrewd investors.
In the United States, Joinef has helped build 80 companies raising more than $100M in venture investment from leading investors such as Index Ventures, Balderton Capital, Octopus Investments. You can read more here.
Finding the right angel
For many people, any angel is the right angel, but if you really want your business to succeed, you want someone with the following attributes:
- Connections – can your angel put you in touch with the important players in your chosen sector?
- Experience – do they have sufficient experience in your niche to understand your business?
- Track record – how much experience do they have in building businesses and equally importantly, how much experience do they have in investing in other people’s’ businesses?
Now you have a better idea of what an angel investor requires, it’s time to start looking for your own personal angel. How do you advertise your idea?
- Spread the word – by talking about your idea to professionals such as lawyers, accountants and consultants, you may be given the name of an angel friend or business acquaintance. You should also use your family, friends and friends-of-friends to disseminate the idea.
- The Internet – the Internet is fast becoming the biggest source of investment.
- Investor groups – if you can access a group of established investors, you will have a golden opportunity to present your idea to several potential investors.
For Angel Investors in the UK:
For Angel Investors in the US:
…just to name a few.
Do you have what it takes?
Once you have the attention of potential investors, you need a compelling argument to persuade them of your idea’s potential. Any angel worth their salt will evaluate your idea across four main areas:
- The opportunity: what is your business model, the market size and customer potential?
- External factors: is the technology available, who are the competitors and is there any regulation?
- The structure: here you need to be able to provide a clear idea of how the business will be run, especially with regard to the number of staff, board members and salaries.
- Your people: the idea may be great and you may well have an excellent skill set, but what about the other members of your team?
The terms of investment
When angels talk about structuring a deal, they want to know what type of financing is required, at what stage will they get their money back and will they have a role in the future?
There are three main ways that an angel is likely to take a share in your company:
- Common stock: the simplest but offers few safeguards.
- Preferred convertible: complicated but offers greater benefits to the investor.
- Convertible note: price not negotiable but it offers angels the most protection.
What role will your Angel take?
Your angel’s role in the business can be anything from a full board member to a silent partner. The angel’s intention to play a more active role than you are willing to offer can be an obstacle, but it can overcome by following these simple rules:
- Negotiate: don’t have a fixed idea; be prepared to be flexible about your angel’s role.
- Timing: complete all negotiations before the term sheet is signed.
- The future: keep the future in mind so that any deal won’t compromise the business in the years to come.
Sealing the deal
A principal question in attracting an angel investor is how much of your company are you willing to part with and under what terms? It’s worth bearing in mind the following facts:
- Win-win: the secret to a successful deal for all the interested parties is to ensure everyone is happy with the eventual outcome.
- Number crunching: angels tend to focus on the numbers, especially at the outset as this has the greatest impact on the future value of their investment.
- Take your time: you may want to get the business up and running as fast as possible, but an angel has the advantage of being under no time pressure and as a result is often willing to wait until the time or the offer is right.
- Negotiating: many angels use third parties to do the negotiating for them so don’t be surprised if you end up speaking to the angel’s lawyer. Bear in mind that some angels simply don’t negotiate but look at the deal on offer and either accept or reject it.