Raising funding from angel investors can provide critical early capital for startups to get off the ground before approaching VCs.
However, understanding how to identify, pitch, and partner effectively with angels requires some education.
What is Angel Investing?
Angel investors are high-net-worth individuals who provide financing to early-stage startups in exchange for equity ownership.
Unlike venture capital firms that manage pooled institutional funds, angels deploy their capital directly.
They typically invest smaller amounts than VCs, ranging from $10,000 up to $250,000.
Angels are often entrepreneurs themselves drawn to the excitement of backing young companies.
Others are business executives, professionals, or family office members looking to diversify assets.
According to the Center for Venture Research, over 330,000 individuals completed angel deals last year totaling $23 billion across 66,000 startups in the US.
Reasons Startups Pursue Angels
For startups, angels provide a compelling fundraising source between self-funding and approaching VCs. Reasons include:
- Accessing tens of thousands to a few hundred thousand dollars to finance early operations and milestones. This allows proving initial traction.
- Benefiting from an angel’s industry experience and contacts in addition to capital. Their knowledge can be as valuable as the funds.
- Getting lower valuations pre-revenue than typical VC rounds, minimizing early dilution.
- Proving model viability elevates financing prospects for pricier VC rounds down the road.
- Receiving warm referrals from respected angels amplifies credibility for other fundraising.
- Partnering with flexible individual angel backers rather than institutional funds. Agreements are more customizable.
- Potential to get funding within weeks or months rather than the typical 6–9+ month VC raise cycle. The quicker access to capital helps de-risk running out of runway.
Startups should strongly consider the angel funding path before jumping straight to VC, if possible. The capital, speed, and expertise angels offer provide huge benefits at early stages.
How Angels Evaluate Startups
Experienced angels apply rigorous criteria when evaluating potential startup investments. While criteria differ by angel, common areas examined include:
- Background of the founding team — experience, drive, expertise
- Traction and milestones achieved to date
- Total addressable market and growth drivers
- Competitive landscape
- Defensibility against competition
- Skills and status of existing team
- Realism of business model and financial projections
- Progress made with the amount raised so far
- Use cases for additional capital sought
In essence, angels want to see an ambitious vision backed by early evidence of product-market fit and customer traction. They look for execution ability more than just slick pitches.
“We invest in outstanding founders tackling big markets,” notes one prolific angel investor.
“Relevant experience, initial traction, and a solid pitch deck are key.”
Ultimately angels must believe the startup has strong potential for a 10x+ return on investment to proceed. The risk threshold is quite high.
How Startups Source Angel Investors
Angel investors can be sourced both directly and indirectly:
- Your own network — Ask entrepreneurial friends and advisors for intros to angels they know.
- Warm introductions — Use your network to connect with angels 1 or 2 degrees removed along with context. This greatly increases reply rates.
- Angel investor databases — Platforms like AngelList and Gust aggregate angel profiles. Many accept blind applications. Research thoroughly before applying.
- Angel groups/syndicates — Angels frequently form groups and syndicates to share due diligence and coordinate co-investing. These have application processes.
- Events — Fundraising events let you pitch in front of groups of angels. Do thorough prep and follow up persistently. It may take months to convert attendees.
- LinkedIn/Twitter — Share your startup’s progress, achievements and stories. Angels looking for new deals may reach out if they find you organically.
- Accelerators/incubators — Top startup programs often have extensive angel investor networks. Participating provides fundraising support.
- Angel conferences — Massive events like the Silicon Valley Forum feature demo days with investors across industries and geographies.
- Competitions — Startup contests attract angels as judges. Be a finalist to present and get their feedback.
Utilize a multi-prong strategy tapping into your direct network, digital sourcing, programs, and events to maximize connecting with relevant angels.
Securing Meetings and Delivering an Effective Pitch
Once on an angel’s radar, you need to convince them to take a closer look. Initial outreach requires succinctly conveying your startup’s traction and potential.
Follow best practices when crafting emails and requests:
- Personalize messages highlighting why you reached out to them specifically. Avoid mass templates.
- Include a brief company overview doc with key facts: problem, solution, market, traction, team, and funding needs.
- Mention any mutual connections to increase response rates. Stress actionability and next steps.
- Follow up persistently with additional value adds like new traction data, sample product info, major press wins, etc. Lack of persistence is the no. 1 reason startups fail to raise angel money.
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If you secure a meeting, bring your A-game to the pitch. Key tips:
- Tell a compelling story. Explain the problem you’re solving, your big vision, and traction to date.
- Don’t get too technical. Focus on the business opportunity and market potential.
- Discuss how you’ll leverage their investment and experience if they get involved.
- Back up assertions with data and evidence. Angels want proof, not hype.
- Outline your go-to-market and growth strategy along with key metrics.
- Provide realistic financial projections and detail how you’ll scale efficiently.
- Be extremely knowledgeable about your industry, competitive landscape, and target users.
- Convey your passion. Enthusiasm for your startup is contagious.
- Highlight notable advisors, customers, and partnerships secured. Social proof matters.
- Address risks and challenges openly. Mitigation efforts distinguish great founders.
Following up after the pitch or meeting with requested information and progress is critical. Maintain communication and provide reasons to engage further.
Many entrepreneurs think securing the meeting means the hard work is done. That’s just the starting line. You need incredible persistence and follow-through for the long fundraising process. Don’t give up.
Negotiating and Closing Angel Investments
If an angel expresses interest after initial meetings, the focus turns to negotiating terms and closing the deal.
Expect a long due diligence process where the angel scrutinizes your model, operations, finances, legal, and code. Be responsive to requests and welcome hard questions.
When negotiating, angels may request:
- Larger equity percentage — 15–25% vs. 10–15% for VCs
- Board seats or observer rights
- Pro-rata investment rights for future rounds
- Minimum investment returns
- Vesting schedules for their shares
Consider carefully which concessions you’re willing to make. Outline your ideal terms before negotiating.
Closing the deal requires agreeing on valuation, finalizing investment documents, collecting funds, issuing new shares, and announcing the partnership. Have experienced legal counsel to navigate this smoothly.
Top angels can provide strategic value well beyond their initial investment. Treat them as partners vested in your success, not just temporary sources of capital. Frequent communication, sharing key metrics, and welcoming involvement in governance shows you value the relationship.
Angel Investing Risks and Rewards
If approaching angels, be aware of the risks and rewards of bringing aboard angel backers early:
Rewards:
- Capital to fund early milestones
- Ability to delay and minimize dilution from pricier VC rounds
- Industry expertise and invaluable advice
- Credibility and connections for future fundraising
- Higher valuation than raising later after more progress
- Speed and flexibility compared to institutional rounds
Risks:
- High dilution given risk at early stages
- Angels may lack experience scaling startups
- Onerous terms or micromanagement by some angels
- No guarantee of follow-on financing
- Complex cap table if many angels invest
Angel money presents a crucial launching pad for startups if you choose partners wisely and align on vision.
But the increased ownership angels demand is very expensive financing if follow-on VC funds don’t materialize. Balance risks when considering if angel funding fits your needs and timing.
Key Takeaways
- Angel investors provide a key source of early-stage capital and guidance for startups before approaching VCs.
- Extensive networking, sticky follow-up, and demonstrating traction are key to winning over investors.
- Ensure you pitch a compelling vision, strong team, and clear growth roadmap backed by data.
- Be ready for thorough due diligence on all aspects of your startup.
- Treat angels like true partners and communicate progress consistently.
- Understand the risks and rewards before finalizing any angel deals.
Angel investors present huge opportunities but require extensive work to identify, pitch, negotiate with, and manage effectively. With the right funding strategy and relentless founder persistence, an angel round can elevate a startup to new heights.
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