Rich Dad Education Blog

Angel investors play an important part in funding start-up and growing businesses; venture capitalists generally are looking for established businesses that have above-average growth potential in high-tech and high-growth industries. Most venture-capital firms do not pursue investments below one- or two-million dollars; thus, are not normally interested in funding smaller start-up companies. Angel investors; however, commonly provide funding after the business has been started by using seed money from the owners or others.

Angel investors are generally affluent individuals who provide money to help start or grow business in exchange for debt or ownership equity. The term angel comes from the practice in the early 1900s of wealthy businessmen investing in Broadway productions.

Profile of a Typical Angel Investor

The Center for Venture Research at the University of New Hampshire, which does research on angel investors, developed the following profile:

• The average angel investor is under 50 years of age
• Angels are affluent, but not necessarily millionaires
• Most are college educated and self employed
• Most angels invest close to home (seven out of ten investments are within 50 miles of their home or office)
• Angels usually don’t invest more than a few hundred thousand dollars in any one company
• Nine out of ten investments are given to small, start-up firms with fewer than 20 employees
• Most angels invest in business areas that they are familiar with and have some expertise
• Minimum expected return on their investment is 30 percent annually, but many want a much higher return – each angel will have their own requirements
• They are risk takers, expecting about one-third of their investments to result in a capital loss
• Angels accept an average of three out of every ten deals they are willing to consider
• Most angels are successful entrepreneurs who want to help other entrepreneurs get a business off the ground
• Angels typically offer expertise, experience, and contacts in addition to money

Estimates are that there are at least 260,500 angel investors active in the country funding more than 55,000 small companies each year. The challenge is to find one in your area that invests in your type of business. It could take four to six months to raise money for your company so it is important to start looking before you need the money.

Take the time to find the right angel investor for your business. Research what other businesses the angel has funded in the past. Make sure there is a match in their interests and your business goals. You might have a great business, with lots of potential, but pitching it to the wrong angel will be a waste of time for you and the investor. Just because someone has money to invest, doesn’t mean they want to invest in just any company. Ask every angel investor you meet if they know of other investors who might be interested in your type of business. Networking is critical to find elusive angels that may have an interest in your particular business concept.

Once you find an angel that seems to be interested in your type of business, pitch your plan. Typically, entrepreneurs make their initial pitch in an informal session. If your idea is judged to have promise, you may be invited to give a more formal PowerPoint presentation followed by a question and answer session.

Tips on Pitching to Angel Investors

• Time is at a premium. Come prepared with solid arguments about the product or service, its marketability and with evidence of commitment to the business in the form of sweat equity and investment
• Tell your story quickly. You not only have to be quick, but remember you are competing for the investor’s attention in a Blackberry world – seeing your potential investor(s) texting is not a good sign. Make your presentation entertaining from the start to get the investor(s) hooked. Tell them about the problem you are solving, followed by interesting information on the founders and how they came together with the business idea
• Briefly tell about unique strengths, background and skills, and how the team will be able to give the proposed business a market edge
• Change your delivery pace throughout your presentation. Speed up when telling stories, allowing you to get through the slides rapidly. Then slow down as needed at more detailed financial and projection slides. Practice will help you perfect your presentation skill
• For a PowerPoint presentation, make sure your slides have style. Get help if you need to add vibrant colors and attractive layouts. Make your slides simple, but interesting and professional
• Highlight the key elements of your product or service and let it go at that. If the investors want more, they will ask for it
• End with a strong message and key points you want the investor to remember. Most presentations end with financials, which, although important, are dull. Instead, end with a slide that gives the key elements as to why they should invest their money in your company
• Then have a slide come up with just your company logo and get the investors focused on you so you can tell them with confidence and sincere passion that you believe in your business
• If you don’t know the answer to a question, say so, and promise to get back to them. Don’t fake it. Angels put a high value on trustworthiness. In fact, acknowledging weak areas will let angels know you need their help and can actually add to your credibility
• A final word of caution. Show enthusiasm, but don’t force it. If a presenter is too excited, it may come across as being phony and credibility is lost. Show your passion through being prepared with a well, thought-out business plan. Deliver your presentation with confidence

What are Angels Looking for in Your Business?

• First and foremost is evidence of a market opportunity with growth potential
• A strong management team
• An exit strategy down the road, including forecasts on taking the company public and a list of potential companies that may want to acquire the company
• A fair evaluation of what your company is worth

The top four reasons investments are rejected: 1) insufficient growth potential,
2) overpriced equity, 3) lack of talent in management team, and 4) lack of information about the owner and/or key personnel.

The presentation is just one of the first steps in getting funding. If the investor likes your idea, plan on them spending a lot of time investigating you and your company. You, of course, should already have a finely tuned, well-written business plan that spells out the plan for the company start-up and projected future growth.

As the angel investor (or a group of investors) is investigating you and your business, you should also be spending time getting to know them. If the angel decides to invest and you decide to accept the money, then this is going to be a long-term relationship. You are going to be working and talking with your angel for months and years, so make sure that your angel is someone you want to partner with. Life is short, so you may as well partner with people you actually enjoy being around.

What Do Angel Investors Expect from Their Investment?

There are probably as many answers to that question as there are angel investors. Each has their own criteria and set of requirements. Get to know your potential angel so you know what to expect. Here is a list of typical expectations:

• Most angels want a position on the board and possibly a consulting role
• Most are looking for anything from a 5 to 25 percent ownership in the business Know what you are giving up; investor financing is the most expensive money you can get, if you succeed
• Some want securities: common stock or preferred stock with certain rights and liquidation preferences over common stock
• Potential investment returns of 30 percent per year to a return of five times their investment in the first five years. Be sure to understand what their expectations are before you seal the deal
• Some angels may want the first right of refusal to participate in the next round of financing. This may sound harmless, but it could limit your access to venture capital funding if the venture capitalists want only their own players on the new team
• Angels often ask the business to agree to not take certain actions without the angel investor’s approval, such as selling company assets, issuing additional company stock, and expanding into a new market. Again, be aware of what control you are giving up in order to secure the funding

One final word of caution – don’t expect to get any money right away. Angels will do a lot of research and carefully investigate you, your management team, and your business plan. This may take several months, depending on how many other opportunities they are considering at the time. That is why it is so important to start your search for funding as early as possible.

And if you get rejected by an angel, ask them to tell you why. Find out if it was your basic business idea, the way you presented the business to the investors, or some other problem. Learn from the angels, they have a lot of business experience. It could be that you have a great idea, but the angel has many other good opportunities at the time and can only fund a few.

Always remember to ask for the names of other investors who might be interested. As with anything else, you will probably have to talk to several investors before you find one who likes your business and one that you want to do business with. You may need to get 100 introductions to get 10 meetings to get 3 presentations to close one deal, but the key is to get talking.

Being touched by an angel really can give your business the opportunity to get off the ground or to expand into the next phase. Search for the proper angel and then be prepared to show them why they will win by investing with you and your company.