A business angel, or angel investor as they are also known, is an individual who invests in a company, typically after seeing the startup pitch and deciding to invest. They are often successful entrepreneurs or investors themselves, with their own track records of success. These individuals can be very helpful for startups because they bring not just money but also valuable experience and connections that help can your company grow and succeed.
But where can you meet a business angel? And how can you maximise your chances of them investing in your company.
In this article we will answer these questions and many more to give you all the information you need about business angels.
What is a business angel?
If you have ever seen Dragon’s Den, or the US equivalent Shark Tank, then you will already have seen business angels in action. They are wealthy individuals who invest predominantly in startup businesses to help them get off the ground. They typically invest after seeing the company’s pitch and deciding to put their money into it, usually in exchange for an equity share in the company. The idea is that the equity share will grow in value as your business progresses, and that the business angel can get a share of the profits each year. It is often difficult for smaller or newer startups to secure funding, so a business angel can fill a funding gap either temporarily or on a long-term basis.
There are business angels who only invest in companies within their specialist industry, and those who like to have a more diverse portfolio of investments. Likewise, there are some business angels will allow you complete autonomy in the day-to-day running of the business, while others may want to take a more hands-on approach. The latter can be particularly useful if you are a young or inexperienced business owner.
What benefits can a business angel bring to your business?
The main benefits of a business angel investing in your company are of course their money, but also the useful connections and know-how that they often bring too. Angel investors can be incredibly beneficial for growing companies because you get access to their knowledge and expertise, particularly if they have a lot of experience in your industry, which can help your company advance.
Furthermore, having someone with an established reputation backing the success of the startup will go a long way when trying to secure additional funding, as it shows that there are influential people who already believe in you and your idea. For instance, if you watch Dragon’s Den, the contestants often have a particular dragon they want to bring on board, because that individual’s name alone can provide access to a certain industry or market.
It is important to note, however, that some business angels may want more than just an equity share though. Some angels prefer complete control over how the business is run while others may ask for more input such as through a board position or even a co-founding role.
What do you need to know when looking for a business angel?
There are a number of things that you need to know when looking for business angels.
Firstly, it is important to remember that these individuals can be incredibly busy and so will not have the time to invest in every startup they see. Therefore, what should your strategy be?
One option is to simply send out cold emails or call up potential investors without any prior contact or introduction. While this may work occasionally, with no personal connection having yet been made, your pitch will need to stand on its own merits rather than your ability to sell the idea.
It is, therefore, better to try and establish a relationship with a potential business angel before attempting to pitch them your idea. Never underestimate how much effort goes into making such connections happen, and keep in mind mind that if a business angel invests, then there is a good chance they will ask you to return the favour at some point, and introduce them to one of your own contacts.
What do you need to include in your business plan?
Once you have secured an introduction, how do you make sure that this potential investor sees what he or she needs from your company? The most important thing for any business looking to secure investment, whether from a business angel, a bank loan, or even from friends or family, is a comprehensive business plan. Business plans are so important because they allow investors to get a clear picture of what the business owner is aiming for.
In your business plan, you will want to detail how much money you need from them and why this is the case. You also need to tell potential investors about your product or service, who it’s aimed at, who is involved in its production, and any protections you have such as copyrights or patents.
Furthermore, your business plan will need to explain exactly how potential investors can make their money back with appropriate projections on sales revenue and growth rates over time .
Depending on whether or not you already have funding lined up (or indeed if there has been any revenue generated), include any investment terms that may be applicable as well as details of other sources of income available should things go wrong. If applicable, then provide some information about your personal finances and any potential conflicts of interest.
As well as providing a comprehensive picture for investors, you also want to make sure that they can understand exactly what it is you are offering them in return should they choose to invest their money with your company.
If the business angel has an equity stake in the business, then how much will this be worth at what point during the life cycle of the company? In other words, when do they get their money back? What kind of ownership percentage will give them access to dividends or share buybacks if these become available? How long before such payments occur from the start up date? Are there any penalties attached if part way through development you decide not to go ahead with whatever product/service you are selling?
The answers to these questions and more should be included in your business plan.
Finally, don’t forget about any legal requirements such as having your document reviewed by a lawyer before presenting it, because if you do not have everything right here then nothing will be able to save you when you enter the proverbial dragon’s den.
What do you need to include in your investment pitch?
The next (and often most nerve-wracking stage) is pitching your business to potential business angels. Hopefully they will have already seen your business plan and invited you to pitch to them off the back of what they’ve seen, but it may also be that they know nothing about your business. Either way, getting the investment pitch right is pivotal in securing the investment your business needs. Here is everything you need to know about the investment pitch:
Your pitch needs to be very focused and include exactly what you would like the business angel to provide. It should also detail why your company is a good investment, how it will grow in value over time (your projected growth path), and of course any revenue projections you have.
If possible try not to leave anything out because this could mean that they get the wrong impression of your idea or business model right from the start, and may never take another look at you again. Remember though, if there are some aspects about either yourself or your venture which might make potential investors wary, then don’t hesitate to mention them upfront. Being open and honest with them upfront means these minor issues can potentially be fixed before they become a major problem further down the line.
Including client and customer testimonials in your pitch is always a good idea as it shows that there are already people out there willing to pay for your product or service. Use this as an opportunity to give the investors something they can relate to.
If applicable, provide some information about how much money has been spent on development up until now and detail any patents or other forms of protection that have been obtained along the way. This should be accompanied with a list of references who can vouch for these claims in case anyone wants additional proof later on. Try not to try anything overly fancy here though because investors don’t want ‘fluff’ – all they’re interested in is what you’re proposing and the likelihood of it succeeding.
Some business angels may request a ‘due diligence’ process, meaning they want to check everything out themselves before they hand over any money – this can be another nerve-wracking part of the whole experience because if even one small aspect doesn’t match up then that could leave them thinking there’s something not quite right about your venture as a whole.
However, don’t feel like this has to be all doom and gloom; make sure you remember why someone would want to invest in your company. Do whatever possible to convince them that you will bring returns on their investment sooner rather than later, meaning that everyone will walk away a winner.
What are the potential downsides of business angels?
Although business angels can be incredibly beneficial to a growing company, they are not without their own downsides. Here are some things that you should consider when thinking about whether or not to approach one:
With the potential upside being much greater, angel investors will naturally want a lot more in return for their investment. This could mean them asking for control of your business which might just take it off in another direction entirely and away from where you wanted it to go. This is why due diligence is something you always need to remember because if an investor spots anything they don’t like then all bets (and potentially your whole venture) may well be off.
Business angels tend to look at companies as investments rather than long-term partners – this means that if your company doesn’t make an immediate profit, then it might be a lot harder to get their attention again. One way around this is by offering them something that other businesses cannot provide. For example, if you own exclusive rights or distribution licenses which otherwise wouldn’t exist in the market, then they will see how important and unique these are and will be more likely to invest.
What are some common alternative sources of business funding?
Before you definitely decide on a business angel, there are some common alternatives that might be worth looking into first:
Although the interest rates will vary depending on your circumstances and where you apply for the loan (e.g., a bank or alternative lender), in general business loans can be a great way to fund your business. They are relatively easy to obtain, and there are various options available depending on your business’ needs. Just remember that business loans usually come with strict repayment conditions so make sure you’re prepared before signing any dotted lines.
This has become increasingly popular among startups over recent years because rather than having one investor who could potentially hold all of the cards, this model allows anyone with an internet connection to invest. This means that the risk is spread among a much larger group of people, and if one investor decides they don’t want to come on board anymore then you won’t lose them all.
To sum up
In the end, business angels can be a great source of investment for any company that is looking to expand. However, as with all things in life it’s not without its own flaws and downfalls which you need to keep an eye out for – will your venture really benefit from this kind of money or do you have other options available? If anything does go wrong then remember there are always going to be alternatives so not to give up or be too disheartened.