Back in the olden days (1978), a theater term was applied to finance, and angel investing was born. As far as I can tell, this is the one and only time that theater and finance have merged, at least outside of one semester of college when I took an acting class.
On Broadway, wealthy individuals who dropped in to support floundering productions that otherwise would have been shut down or never even started were called angels. Likewise, wealthy individuals who support startup businesses that haven’t matured enough for venture capital (VC) funding are called angels.
Angel investing these days is sometimes done by celebrities such as Ashton Kutcher, Will Smith, and Jay Z. Maybe there is something to this finance and theater thing.
Overview: What is an angel investor?
Angel investors most often participate in seed funding rounds, which are the initial funding rounds when you raise money to figure out how your product and business will function.
While there are many professional angel investors, any initial investor who helps fund your business when you may not even have revenue could be considered an angel investor.
With the rise of celebrity investors and even relevant TV shows, angel investing has gained popularity. There are now several websites allowing anyone to make angel investments, and investment clubs that cater to startups are popping up around the company.
3 advantages of having an angel investor for your business
Here are a few benefits of engaging an angel investor.
The main reason to pursue any funding for your business is growth. You need the money to hire new talent or buy podcast ads to push your business to the next level. Angel funding is usually used to map out how your product will be produced and to buy manufacturing equipment.
A big part of the angel investment should be used for testing. Figure out what your business model will be, and set yourself up for future growth.
2. Lead investor
Lead investors guide you through the financing rounds. They’ll work with venture capital funds on the term sheets and try to recruit other potential investors.
Not all angels will be able to be lead investors, but it will be a big help to your business if they have experience with venture capital finance. Knowing someone is on your side working with other funds and finding new ones frees you up to focus on the business.
After growth, the key thing to look for with angels is someone who has experience in your industry. Someone who became wealthy running a similar startup business and raising capital for it is the best-case scenario.
This doesn’t mean you need to find a billionaire who ran a publicly-traded company. Anyone who has been in your shoes can be valuable. These are the people you want to lean on when making big decisions. Use their mistakes to not make your own.
3 disadvantages of angel investors for small businesses
Keep these items in mind when you are negotiating with an angel investor.
1. Lack of experience
Not all angel financing comes from experienced capital raisers. As noted earlier, it can even come from actors. In the early stages, you may need to take money from whoever will give it to you.
This could mean it comes from someone who does not have much business or financing experience. This could come back to haunt you if they later feel betrayed by a dilutive round of venture capital, or if they think they should be more involved in the business than they are.
But this may be the risk you need to take. It’s a weighing game between the investment you absolutely need now and the potential heartburn you’ll go through in the future.
2. Required return
Angel money comes with a price. Usually, angel investors earn money from the investment only. They do not earn carry from their clients, and their investment will likely be diluted by future rounds of venture capital.
To be able to make sure they make money on a very risky investment, they’ll either charge a super high interest rate for debt or attempt to negotiate the implied business valuation down to lower levels.
It is incredibly important for your future to not give away too much. If you give away 50% of the business for $100,000, there will be nothing left for the venture capitalists.
Smart angel investors will try to get some kind of control over your business. If there is a board of directors, they’ll want a seat, and they may even try to write into the contract that they have final approval over some capital expenditures.
If they are a highly successful businessperson, this could work out and save you from making mistakes. But it could also be suffocating to the business and to your strategy if you’re trying to innovate but you need to get a signoff for every little move.
Even if the angel has the best intentions, you always want to make sure you have final control over all decisions. It makes sense to have one on as an advisor, but this is your business and you will need to be the one who makes it successful.
Ways you can find an angel investor for your business
If you decide to look for an angel investor, here are some ways to find one.
1. Talk to friends and family
The easiest way to find an investor will be talking to your wealthy uncle or that former college roommate who invented a new type of litter box and got rich. People whom you already know and respect will be the most likely to buy into your idea.
Just make sure you are ready to put the relationship on the line — losing money does weird things to people.
2. Network with business owners
Go to alumni events for your college and meet with business owners you are connected to. You will probably fail a lot with this method. It’s cold calling. But if you find someone, you could develop a great long-term business relationship.
3. Use websites
Here are the most popular websites for angel investments:
I would reserve online searching for angel investors as your last resort. It is not as personal and may not even be local. You want to look for someone you can work with for the long term.
Calling all angels
Starting up a new business is a frantic time. You have to get organization documents ready, figure out a business plan, and, hardest of all, raise money. Angel investors are your best bet to raise money and get someone experienced in your corner.
View more information: https://www.fool.com/the-blueprint/angel-investor/