If you’ve reached the point in your startup’s journey where you have gotten together early data and have some momentum going, you might be ready to start looking for angel funding, or angel investing.
This early chunk of capital can cover your initial overhead costs, and give you some runway to start regular operations. It typically comes from angel investors, who can also be to as private investors or seed investors.
In general, angel investors are high-networth individuals who have deep expertise in their industries, and are excited to support innovation. They are also willing to take on more risk than venture capitalists and venture capital firms are, and therefore are more likely to invest before your R&D is complete, and usually don’t require the same level of business planning.
Unlike VC firms, who rely on investment funds to fund an investment, angel investors put their own money into a company. Because they are using their own cash to fund an investment, angel investors are often more open to negotiation, and are less strict when it comes to an agreement.
Securing an investment from and establishing trust with a well-respected angel investor will also add to your credibility as an early-stage business and be a source of important networking opportunities going forward.
On first inspection, it may seem easier to get investment from angels than it is from VCs. However, it still requires work, not just a great idea. Below, we have outlined the steps to take before you pursue funding from angel investors.
The key to fundraising from angel investors is meeting people who will be interested in and excited by your company. This means attending industry events, presenting at conferences, and showcasing your company at demo days, where angel funders are sure to be.
You can attend events, present at conferences, engage in conversations with your community, and even write content for industry blogs. Even if you meet investors who are not exactly the right fit to invest in your company, they will likely be able to introduce you to other individuals and angel networks who are.
These investors value the opinions of their colleagues, so introductions will be key during early fundraising. Think of your early investors almost as part of your management team. Even though you won’t be seeing them during team meetings or refining product details together, they may become advisors who help you navigate challenges and make important business decisions.
If you’re not sure where to start, the Angel Capital Association (ACA) is an excellent place to search for accredited investors and angel groups and try and connect with them. Although it is a platform for angel investors rather than startup founders and small business owners, its directory is robust.
Know your product and how you’ll sell it
This may seem obvious, but no investor will give you money if they don’t understand what you’re trying to do. Before you begin thinking about raising funds, make sure you have a concise, clear way of describing your product or service and how it fits into the existing market. This typically means having a well-prepared business plan.
What problem are you trying to solve, and how are you solving it? How does your product or service work? How will it be monetized?
This is where you cover who your customer is and the marketing and sales strategies you will use to capture them, and the potential revenue (or total addressable market).
Clearly explain your short and long-term goals and be as specific and as concise as possible, and include your plans for marketing and sales. Investors want to see that your product is both unique and scalable, and that it has potential to make a profit.
Organize your data
While angels may not conduct as much due diligence as VCs will, you will still need to present them with data that shows market opportunity, product-market fit, and evidence of early customer adoption.
If you’ve already been collecting this data, and have a refined business idea and strategy, you’re in a good place.
Angel investors generally want to see that you have considered your competitors and created something that sets you apart and can capture a significant portion of the market. Showing early customer adoption could be tough depending on where you are in your company’s journey.
But, depending on the angel investor, you might need some proof that people are using and will continue using your product or service. If you have it, include projected usage data, and how that will affect your financials. It goes without saying, but be realistic.
Acknowledge your challenges
While you’re explaining all of the good parts of your business, be sure to address any challenges you can foresee. You can’t predict the future, but there are some things that you should be prepared to discuss.
Do you have one especially strong competitor who already owns a large share of the market? If you’re selling a product, is there an element that’s particularly difficult to source?
Additionally, show that you have also considered and planned for possible risks to your business, including technology, liability, regulatory and legal risks. If any of these have already come up, explain how you mitigated them. If not, explain how you plan to deal with them.
Prepare your ask
Before you ask for money, you should know how much you need and what you’re going to use it for. You need to understand how much money you need to sustain your operations, and how much you’ll need to keep growing.
Consider your existing overhead, including the physical laboratory space you use, lab equipment and supplies, and staffing. Then, think about what you’ll need to add in order to grow, and how long you need to be able to sustain yourself until your next round of funding.
You should also include the terms, and whether you plan for any other investors to be involved. By preparing this information, you’ll also show your investors that you understand the practical and financial aspects of running a business and that you’ll spend their money wisely.
Tell your story
Regardless of your startup’s stage of development, your pitch has to showcase your story. Because angel investors are looking for great ideas from great entrepreneurs, spend some time thinking about and refining how you talk about yourself.
You want to inspire these potential investors to get as excited about what you’re doing as you are. Explain where the idea came from, and what makes your team the unique perfect group to execute it. Your angels will be investing in your business, but they are also investing in your potential as a team, so let them get to know you.
Starting a business, let alone becoming successful, is extremely difficult. They want to know that you’re committed and can get through the challenges you are sure to face. Because you will have a partnership with them, make sure they are a good fit for your team and your company in general.
Put together a pitch deck
The final step is to put together a short pitch deck that explains everything we just went through. The basic rules of presentations apply here:
- Be concise and use minimal text.
- Emphasize any impressive figures you have.
- Make sure your data is clear and complete.
Even though it’s expensive, it’s worth using a professional designer to create a logo and help you make it as visually appealing as possible.
You will most likely be sending this to multiple potential investors, and it should reflect your brand and your professionalism. We’re rooting for you!
To read more about what to expect during your early funding journey, we have a couple of articles for you below:
- A Guide to Seed Fundraising – Y Combinator
- What Angel Investors Want To Know Before Investing In Your Startup – Forbes