Angel investment can be a vital financing option for startups, early-stage funding is high risk, and it takes a certain type of investor to ‘go first’ and follow a founder’s early stage venturing vision. But be aware: not all angel investors are equal. Sometimes taking capital from any source can be tempting, but it pays to do your research and know the kind of angel investor partner you want to take on.
Originally a term used to describe investors in Broadway shows, ‘angel’ investors are often entrepreneurs who have exited their own successful business and who are interested in innovative startups and looking for a greater return on investment than traditional investment channels can offer. The ‘best fit’ angel investors aren’t just in it for the money, though. Most get into angel investment because they want to mentor founders and be part of their journey, but without getting under their feet and having day to day operational responsibilities.
Although angel investors are more likely than venture capitalists to take a chance on an early-stage pre-revenue startup, you still need to be far enough into your MVP development to entice an angel to invest. Angel investments are great for funding the completion or refinement of your product post-testing, or for building out your first team hires to help your product gain traction.
However, the backing of angels should be more than just financial support. Thinking of it in just a provision of cash can be opportunity limiting, the different abilities and experiences of an investor can be a growth multiplier for both a founder and the venture. Bringing the right person on board can make the difference between long term success and short-term failure.
Angel investors tend to come in two flavours: an individual or a network. While dealing with a single potential investor is viable, my recommendation would be to work with one of the many angel investor groups out there. There’s a couple of reasons for this advice.
First, the groups tend to screen investors before they can become members. You shouldn’t have to worry about their intentions or capacity to fund. They also like to invest in packs, so you can get a lot of different expertise when taking their money. In most cases you won’t actually be dealing with a whole bunch of different investors, they will usually appoint a lead and you will deal mostly with that one person.
The presentation process is much more organized with angel investor groups and you will usually get to an answer more quickly. You are still dealing with individuals and their own money, so it’s still quite different than pitching to a VC firm, just more organised than pitching to a single individual investor.
Finding the angel investor groups isn’t the issue, getting in front of them is. As you can imagine, the better angel groups have a long list of people like you that want to pitch to them. Most investor groups have a similarly structured process for finding investor ready startups, and it’s important to be aware as to what that process looks like, so you can prepare and know what to expect.
So what qualities, experience and skills make for a great angel investor partner for an early stage startup founder?
1. Personal qualities There are the usual caveats here around personality, values and behavioural traits, but in my experience, I’d say there are three key traits to look for:
- Discipline: a founder needs a supportive angel investor to bring discipline to their thinking, and guide them on doing just a few things right, avoiding a scattergun approach, especially when new funding lands.
- Scepticism: Scepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.
- Independence: going against the herd mentality and offering a different perspective.
2. Not all wallets are your wallets – ensure it’s the right sized cheque The first injections of capital into a startup are the most expensive money in terms of dilution. Angel investors seek a reasonable chunk of equity in return for their investment, reflecting the immediate risk and also downstream dilution they anticipate. Whilst angel investors help get you on your feet, make sure their expectations are fair, and it’s also the right sized cheque for you. Whilst this form of financing will typically have far less onerous terms regarding company performance than subsequent raises, ensure it leaves you with a significant shareholding and you’ve not vested too much equity away.
3. Good decision-making skills Seasoned business angels don’t wait too long to dig into the nitty-gritty details when making a business decision. The best angels are those who take decisions based on the present situation and give their verdict straight away instead of making the founder go through a nail biting wait. Look for an angel whose primary goal is to help you kick start your venture and make you successful, with a ‘hands on, hands in’ approach.
4. Patience For any of us, having patience is truly a virtue. A patient business angel understands the dynamics of business and understands that revenue does not start rolling in overnight. They do not think short term but instead they have the ability to see the bigger picture in terms of the long-term future potential. You want an enlightened angel who is relaxed and calm; not someone who is jittery and scared of challenges, who recognises that all new companies struggle in the early years until they become stable.
5. Reputation & track record Undertake due diligence on a prospective angel to ensure you get recommendations from their current or previous portfolio companies as well your local start-up community. Whatever you can discover about the way they build and manage relationships with entrepreneurs will help you decide whether they are a good fit for you. Angel investors can be truly fantastic partners and mentors for young companies – just make sure the one you pick is right for you.
6. Results-driven Another quality to look for in an angel investor is a results-driven attitude. Results-driven angel investors have a clear perspective that focuses on long-term profitability. They strive to help businesses grow while ultimately becoming profitable and cash positive down the road. They will pull your attention to achieving breakeven, whilst you maybe too focused on pure growth.
7. Emotionally invested The best business angels will always try to do everything they possibly can to facilitate progress of the founder and growth of the business venture right from the start. They will help you with hiring new people, facilitating network introduction, to assisting on product strategies etc. But beyond that, you want angels who are emotionally invested too, they care sincerely, support the founder personally, and go above and beyond to help them move forward.
The strongest angels that I have worked with are committed rather than merely interested in the business that they invest in. They exhibit empathy, engagement and loads of encouragement during the formidable early years of a fledgling startups growth. Such angels have startup blood running through their veins, and want to give back to a similar endeavour that ignited their soul, and provide direct benefit to the vibrant, innovative, growing startup ecosystem in their community.
8. Relationship builders not simply money makers It is only but natural to think that business angels would be more concerned regarding business operations since their money is on the line. But that is not exactly true. As discuss above, relationship building is an important aspect securing the right angel funding.
Good business angels make great mentors, since most angels have been in the same shoes as the new founder they are helping today. They are able to coach the entire team on how they can achieve success.
9. Supporting and challenging Angel investors are fully aware of what it takes to develop a successful startup and the challenges faced. They know about the highs and lows that a new business venture has to undergo before tasting success. These are the investors who will challenge and guide you every step of the way. The best business angels are those who are very supportive of the entrepreneurs and work collegiately, so much so that they will willingly roll up their sleeves to help in problematic situations, but also challenge constructively too.
Your angel investor should have a proven record of investing in successful start-ups. This shows that they have the necessary experience to guide your company through the rocky start-up phase. Ideally, your angel investors should also have deep knowledge of your industry, but balance this to bringing a fresh perspective to challenge your thinking.
10. Deep pockets – can afford to lose their money Seasoned angel investors realise that many of their investments will fail. However, sometimes angels feel they can’t afford to lose the money they put into your venture, so be mindful of angels that are nervous about their investments who may press you to make decisions that result in a quick ROI, but hamper long-term growth. You want an angel who accepts the downsides – and upsides – of investing in an unproven start-up, and who is willing to stay invested for the long-term. Such angel investors are the most likely to support you in growing your company.
The best angels also have enough money to invest along with a few other angel investors they can carry your company’s capital needs, and ideally the next round of financing. While many small investors can add up to a substantial infusion of capital, having too many investors can be distracting and can make further rounds of financing more complicated with a crowded cap table. A small number of high-quality angel investors, all with strong experience and mutual trust is ideal.
The angel investor community is filled with folks with funding and relevant entrepreneurial experiences, who can spend time with you and your founding team. This makes them helpful in both identifying challenges and recommending solutions. In the early stages of a startup, the challenges are not always clearly defined business problems, and often you need help to navigate and select the right options and balance opportunities and timing issues.
Cleary, you should seek to onboard angels who bring more than their cash to help achieve your growth ambitions. Do your due diligence and be clear about what you are seeking, and for each prospective angel investor you meet identify why they are a fit for you. If you can’t find a reason, then don’t take their money and remove them from the list of potential investors.