Seed, Sow, Water, Grow: 4 Expert Tips to Secure Angel Investment for Your New Business Venture
Understanding how the sector operates and finding your niche will empower you to successfully close the right angel investor for your startup.
Without angel investors, most startups wouldn't be able to survive. In the U.S. alone, angel investors pour $25 billion into 70,000 companies every single year. Yet despite being such key players in early-stage companies' growth, many founders have limited knowledge of how to access angel investments.
Angel investors work predominantly with new ventures because they set their sights on passion projects, personal commitment, and innovation. At the same time, angel investors tend to be more approachable for entrepreneurs, with their more 'human' touch compared to big venture capitalists. Angels are also more hands-off and agile than traditional firms.
Nonetheless, when navigating the close-knit world of angel investors, founders who aren't well-prepared risk quickly diluting their pool of potential benefactors. So, here are four expert tips to secure angel investment for your new business venture:
1. Bootstrap before starting your search.
When you decide to launch a startup, it's best to start by using your own money to fund the business. Whether you have savings set aside, or you want to immediately bring in customer revenue and reinvest it, bootstrapping means that you continue to own 100 percent of your venture. The early days of any company are some of the most crucial, and you should use them to prove that your business can reach its first milestone independent of an angel investor.
For example, if you're aiming to build a restaurant, you should have the concept, proposed menu, spatial design, and sample dishes, before you raise any money. At the very minimum in any industry, have a pitch deck ready prior to searching for investors. Completing these steps using your own money will place you in a better light when you come face-to-face with investors, who will have evidence that you're organized, driven, and business savvy.
Gabe Zichermann, chief executive of Failosophy, says that the majority of bootstrapped funding comes from the four Fs: founders, friends, family, and fools. When you're starting out, these people are going to be more forthcoming than angel investors and should be approached first, if possible. Not everyone’s friends and family will have the means to support their venture, in which case you’ll have to rely more heavily on personal income, pre-order sales, and early sales. "Only once you've exhausted all early funding options" adds Zichermann, "is it time to reach out to angels."
Bootstrapping does not by any means lower the ambitiousness of your goals: Craigslist, GitHub, and GroPro all began as bootstrapped companies, and today are worth hundreds of millions of dollars.
2. Find your founder niche.
As Zichermann notes, there are angel investment groups for just about every sector of the population, many of which are helping to close the gender and ethnic gaps in the investment sphere.
There are many angel communities geared towards non-majority founders, and if you’re from an underrepresented background in your industry, it's important to do your research and find a community that speaks to you. Tara Sabre Collier, angel investor and entrepreneur in residence at Oxford University, recommends leveraging your educational and professional networks such as alumni and civic organizations, as well as industry associations, LinkedIn, and Crunchbase. She continues, "be conscious to hone in on investors who have backed people from the same background as you, and who have similar companies. Once you've pinpointed your group, make an active effort to be part of the conversations taking place there and establish connections with others."
To listen in to Gabe Zichermann and Tara Sabre discuss the best ways to access support as a non-majority founder sign up to our live webinar on 09/09/20 at 3pm ET
3. Be selective with your angel meetings.
The moment you step into the investment world, you'll start creating a reputation for yourself. Any contact you have with investors and the way you present yourself will be discussed among investors. That means the pressure is not only on making a good impression, but also leaving a positive trail behind you.
If you were to enter talks with a number of people, you would have to try especially hard to minimize the number of no's you receive. Because investors will speak among themselves, and if you have a predominantly negative track record that could impact how future angels view your pitch.
To avoid getting stuck at the investment stage, Zichermann advises not agreeing to meetings speculatively, as you might do in later fundraising rounds. Instead, ensure that you pre-qualify every encounter with investors - that means being confident that their tactics, vision and typical demands are a suitable match for your venture, but also making sure you’ve reached certain targets. These include surpassing your first business milestone without angel help, and having concrete data about your startup's performance so far. Also avoid asking for more money than necessary to get to your next milestone.
AngelList is a great resource for getting an overview of the current startup and investment ecosystems, while the Angel Capital Association is a collective of accredited angel investors in the United States. Both tools can help you nail down your competitive advantage and assess where and how to pitch your venture.
4. Draw up a standardized investor agreement.
Founders can expect anywhere from $5,000 to $50,000 per angel, Zichermann, says. To finalize an angel offer, you need to have a standardized document that confirms you're taking the capital. Rather than custom-making your own form, SAFE (Simple Agreement for Future Equity) is the most common and secure one to use, and templates of it can be found online for free. SAFE is a convertible note and essentially states that in exchange for money, your investor has the right to purchase future equity in your business.
SAFE will be attractive to angel investors because it gives them the option to own a slice of your company down the line. For you, as a founder, SAFE lets you fundraise in a faster, more agile way.
Remember, your relationship with an investor doesn't end after formalizing the funding. You need to have regular communication with one another: send out detailed updates (monthly if not quarterly), and be transparent about anything you need along the way. This isn’t just to be polite - it's vital in case you need more funding from them later on.
Angel investment is invaluable for startups, however, it shouldn't be the first funding resource you look to in your business journey. If you can bootstrap, it is a powerful way to develop and strengthen your company until it’s ready to present itself to angel investors. Then, understanding how the sector operates and finding your niche will empower you to successfully close the right angel investor for your startup.
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