Angel investors can be a solid option.
With a higher chance of you retaining more equity in the business and having an investor who believes in you, angel investors can be an effective funding option for your business. — Getty Images/RicardoImagen

For startups seeking funding, angel investors are a solid choice. Like all investors, angels can be an extremely valuable resource for capital and overall business knowledge.

"Today’s investor landscape includes such a variety of niche investors … with the expertise to provide value to the entrepreneur as the entrepreneur builds on an idea or existing service or product," said Bob Belshe, audit partner-in-charge at Sensiba San Filippo. "Many investors began … on the other side of the business as entrepreneurs or employees of successful companies. By issuing equity to these strategic investors, goals are aligned between the financers and the entrepreneurs."

However, before you start looking for investors to pitch, it’s important to understand how angel investments work and how they differ from other types of funding.

What is an angel investor?

An angel investor is an accredited investor with a high net worth who is willing to provide personal financial backing to promising startups.

"Since angels [are] investing their own money, they are often very engaged and helpful," said Ted Chan, founder and CEO of CareDash.com. "The most valuable angels are successful entrepreneurs, business operators or experts who can help get your company off the ground."

Venture capitalists, on the other hand, usually invest other people’s money. These investments are usually higher risk, but also have the potential for exponential growth.

"VC firms typically invest in Series A rounds and beyond," explained Matthew Wolf, head of advisory at Joorney. "Your venture may be one of dozens of portfolio companies they are working with and you may not get the mentorship and guidance you would from an angel investor. However, VC firms can typically write larger checks than angel investors, which is why they are better suited for later funding rounds."

Because angels are typically looking at other factors besides their potential return on investment, some entrepreneurs find that they are easier to work with and provide more favorable terms than venture capitalists.

[Read: How to Choose Between Equity Crowdfunding and Angel Investments]

An angel investor is an accredited investor with a high net worth who is willing to provide personal financial backing to promising startups.

The pros and cons of angel investors

The pros:

  • Angels may take less equity. Since an angel investment is often a smaller dollar amount, you can often retain more equity of your company, said Chan.
  • They invest because they believe in you. "Even if your business isn’t fully ready for investment, angel investors will invest if they believe in the founder(s)," said Matt Gira, founder of FounderCo.org, who noted that investments by angels are usually "passion projects" for them.
  • They might trust you more than a VC. According to Calloway Cook, president of Illuminate Labs, "Most angel investors will trust the judgment of the company founder rather than try to sway business decisions," because they're investing less money.

The cons:

  • It can be hard to find the right angel. Gira noted that each angel investor will have their own criteria when it comes to their investment strategy, so you may not know why they invest in one startup over another.
  • You might need multiple angels to get all the money you need. "Managing all these angels can be incremental administrative work, and relationship management," Chan said.
  • It might not be worth the time and legal effort. "If you're raising $100,000 or less, think long and hard about whether it may be better to just try bootstrapping your business and not delaying the launch for such a small sum," said Cook.

Where can I find angel investors?

If you’re not sure where to start looking for angel investors, try the following strategies:

  • Personal/professional network. You'll likely need to be introduced or referred to angel investors, so get to know the right people to make those introductions for you.
  • Local chambers of commerce, Small Business Development Centers and other local business organizations. According to Bplans, angel investors tend to invest in businesses that are close to home.
  • Angel investor websites. Many websites exist to match entrepreneurs and angel investors, such as Angel Capital Association (ACA), Gust (formerly Angelsoft) and Carrefour Capital Connexion.

[Read: Business Investors: A Guide to Knowing When and How to Find One]

How to pitch to an angel investor

Think you’ve found some ideal angel investors? Here are some tips for making your pitch:

  • Lean on your network to make the right connections. Chan suggests using “a tight network of connections to recommend angels that are going to be good ones [for you] to work with.”
  • Attend startup events and build relationships first. Gira recommends meeting people in your startup ecosystem: "Prove that you’re a founder who is growing personally and professionally, and stay in touch with those you connect with!”
  • Know your market and competition. “Prove to your potential investor that you really understand your market,” said Cook. “If you can win over their trust … it will go a long way towards raising a successful angel round.”

Whether you choose to pursue an angel investor or not, be sure to carefully weigh your funding strategy options and to always thoroughly vet any potential investor you may want to pitch.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published March 10, 2020