What Is Angel Financing?
Angel financing is an investment model in which business angels provide financing support to small businesses. Business angels are individuals with high net worth, and they give funding in return for the equity. This financing can either be a one-time investment or can involve ongoing support. Angel investing has high risk, but it also provides you with high profit.
Angel investors are high net worth individuals who have earned a minimum of $200,000 in the last two years, and are interested in providing capital to new and emerging start-ups.
How Does It Work?
Angel financing is a straightforward form of equity financing. These angel investment network look for innovative early stage startups from their sources. Angel investors’ sources include entrepreneurs, angels under the same network or group, investors interested in partners, etc. Post a thorough screening process; they call the start-ups for a pitch. If they are impressed by the pitch, due diligence review is the next step. Subsequently, you will get a term sheet and the final contract to close the deal.
The objective of these group of angel investors is to sell their equity shares in the future for a substantial profit. Many venture capitalist take active participation in the business activities. They give advice, help to build your network, guide you through further funding rounds, etc.
What Are The Benefits Of Angel Financing?
These are the prominent reasons why businesses seek angel financing despite the high risk:
1. They Help In Growing The Business Network
Angel investors are individuals who do not merely provide capital; they also add value to the business. A majority of angels are seasoned investors carrying staunch experience in a particular industry. They help the start-ups by offering them guidance and contact, supporting their growth. Moreover, you can also contact them to be a part of negotiations when you need help with clients. They are deeply interested in the start-ups they have invested in and prove to be helpful.
2. Angel Financing Process Is Quick
There may be a time where you need quick cash to continue certain tasks. However, getting funds can be a complicated and long process, especially if it is a big amount. An important benefit of angel financing is the ability to dispense the early stage investment funding quickly. If your idea is innovative and the pitch is impressive, you can get the desired funding within one or two months.
3. Angel Investors Are Easy To Find
There are thousands of angel investors across the world, making them easily accessible for start-ups. And there are different groups of investors investing in startups that regularly get together to explore investment opportunities. Locally and regionally, you can get in connect with potential investors; it’s a matter of searching properly.
4. You Don’t Have To Repay Them
One reason why start-ups take the risk of taking angel financing is that you do not have to repay them. Moreover, they do not ask for any interest in their money as well. However, you have to give the equity stake in your business; typically, it is around 10%. If you manage to accomplish growth, then both parties get the profit. But if you do not grow, there is no need to pay the investment back.
5. Angel Financing Can Pave The Way For Additional Financing
Start-ups that angel investors already support appear more attractive to other investors. In most cases, businesses that angel investors funding sources are likely to survive at least four years. Moreover, if you prove the success in a shorter time, it can pave the way for additional financing.
6. The Contract Are More Flexible
Tradition lenders generally seek formal investment criteria. However, angel investors are more flexible with their agreements than venture capital firms. They invest their own money, which allows them to be more open to negotiation. Therefore, you will not feel much bound by the terms of the contract.
7. Angel Investors Are Interested In Bigger Picture
Often angel investors put their money on business models that are closer to their heart. They can see how the investment will benefit the community with regard to employment and economic growth. They provide you with the fund after perceiving your business from different aspects beyond their profit. As the business matures, founders grow a deeper bond with these investors. So even when angel investors are no longer a part of the board, they still contribute.
8. They Can Add To The Business Credibility
These investors are experts in their respective fields after launching successful businesses. Start-ups can significantly benefit from their expertise. When you are closely working with people who already know the industry, it can help you grow. They play a big role in creating your brands. While some of them like to keep it low-key, angel investors are ready to help the business. You can use their reputable and market value to create your brand and improve credibility.
How To Find The Right Angel Financing?
Finding an angel investor is detrimental to your business. Angel financing is only effective when you have a credible and reliable investor by your side. Here are some tips to consider when looking for an angel investor for your business:
1. Browse Angel Investor Networks
Browsing through these networks is effective in making your business visible to these investors. You will find hundreds of angel investors in your country. You can pitch your business to these investors, and they share the information within the network. For instance, ACE-Net is an online network for angel investors and start-ups. It allows them to connect with each other based on the location.
2. Don’t Overlook Your Network
One of the easiest ways to tap this wealthy individuals is by tapping into your network. You might have contacts that are aware of your business. These individuals are more willing to hear out your pitch. So reach out to such individuals, present your business and try to create engagement. Social media like LinkedIn is also a great platform to reach out to high valued individuals from your own network.
How Do You Raise Funds From Angel Financing?
Now that you have found your angel investor, it’s time to raise capital. The way you pitch your business determines whether or not you will get the funds. So here are some factors that you should consider while preparing your pitch:
1. Don’t Overhype Things
Angel investors are looking for businesses that can keep it real. They are going to be part of your business, so over-promising them would not work. Use simple words to explain your business, its objective, solutions, and other things. You want to make it easier for them to understand your model. How can they invest when they don’t get what you are selling?
2. Give It A Personal Touch
Angel investors focus on ideas and personalities. Therefore, you have to come across as more friendly, engaged, and personal during the pitch. Venture capitals are more focused on great ideas, whereas angel investors look for great personalities too. It does not mean that you overdo it with a personal touch. You have to find a friendly way to approach them and keep them engaged throughout your pitch. There needs to be a balance between being friendly and formal.
3. The Presentation
If you manage to pass through the pitching, the presentation is the next big step. This step comes when you. You may be presenting to a group of 10 to 40 people in a room. All their attention will be on you, so be prepared. You will get 20 minutes to entertain, inform, and convince your angel investors.
4. Voting
This is the stage where the angel investors group discusses your pitch. Depending on your performance, they will vote whether or not to invest in your business. If the votes are in your favor, there will be a lead conducting due diligence and review. This will take a month if everything goes well. You may have to come for another presentation where you will have a discussion with the angels.
The Bottom Line
If you are looking for a flexible and faster way of getting funds, angel investors are right. These investors are more accessible and can be a great asset for your growth. Make sure that you only go for accredited angel investors or groups. Along with being investors, they play an active role in your business growth.
Therefore, you want to be associated with reputed investors. Finally, your funding depends on how you pitch the investors. These investors are not looking for great promises; they want great ideas and personalities. The more practical and personal you will keep your pitch, the greater are your funding chances.
