Most entrepreneurs have found by now one or more of the many popularcrowdfunding sites, and have the name and contact information for at least one of the big venture capital firms. But many have no insight or connections to the ethereal angel investment community, which actually funds more startups then all other venture sources combined (over $25 billion annually).
In fact, there are a few key sites to help you find angels, including AngelList and Gust, but these don’t tell you very much about how Angels work, and how to find the right ones for your startup. As an active angel investor, I can tell you what doesn’t work is broadcasting your idea description to flocks of angels, hoping that one will swoop down to anoint you with funding.
A better approach is to first understand who these people are, why and how they invest, and then focus on the ones who are the best match for your particular startup stage, location and industry. Here are eight key insights that will help you find a productive match:
- Angels want equity ownership, not causes. By definition, angels are accredited investors, who invest their own money for a percentage of the business. Each has met legal securities minimums for net worth and professionalism, to reduce the risk to entrepreneurs. Their realm fits between crowdfunding and venture capital sources.
- Most share expertise as well as money. Angels are typically current or former entrepreneurs who want to bring more than money to your startup. They prefer local opportunities where they can meet and work face-to-face with your team. Thus, angel investments from across the country or internationally are rare.
- Individual investments are limited to less than $100,000. Groups of angels may syndicate multiple individual amounts, but if your total request exceeds $1 million, you need to focus on the venture capital alternatives. On the other end of the spectrum, crowdfunding or “friends and family” amounts might be as low as a few dollars.
- Angels prefer strong teams to big ideas. That means you need to lead with your credentials, rather than your disruptive technology. Warm introductions from common friends are even better, so networking with potential peers and future investors is highly recommended well before it’s time to ask for money.
- Your pitch and business plan are important. Perhaps you can get money from friends and crowdfunding with no plan, but angels look for the extra discipline and effort demonstrated in a written plan. Make sure these cover your business model and exit strategy, so the angels see how both of you will make a reasonable return.
- Opportunity sizing and financial projections must be credible. Every investor likes to see opportunities that are large, with double-digit growth. To be fundable, fifth year revenue projections need to be in the $20-$100 million range. Larger numbers are not credible, and smaller ones may make a great business, but won’t attract angels.
- Avoid risky or questionable business domains. Don’t expect angels to invest in work-at-home schemes, gambling sites or debt-collection type business proposals. Other notoriously risky or specialized businesses usually avoided by angels include brick-and-mortar retail, restaurants, telemarketing and consulting.
- Early stage research and development won’t excite angels. Every angel looks to scale the business after you have funded product design, perhaps with friends and family. Angels need to see a proven business model, with a working prototype and preferably a real customer or two. Look to grants and strategic partners for seed funding.
Above all, remember that angels are really business people, just like you and me. They expect you to always show integrity and respect for their position, just as they respect yours, since they were likely once in your situation. They probably won’t respond well to large egos, failure to do your homework or pressure tactics.
Persistence and passion are seen as virtues by angels, so rejection should be only a temporary setback. The common response of “come back when you have more traction” means exactly that. But before you return to the same angel, remember there are more than 250,000 others in the U.S. alone. That’s the real reason that more startups get funded this way than any other.