Obtaining funding for startups at the appropriate time is essential to expanding your company. Though startups have many options to raise initial capital; bootstrapping, incubators & accelerators, and angel investors, among all, Angel Funding comes out as the most preferred fundraising option. Most startup founders consider raising seed capital from angel investors as they provide access to capital, expertise, and guidance to scale your business. However, the question is how to raise funding from angel investors.
This article provides a comprehensive guide on how to find the right angel investors, how to approach or convince them, and tips to get funding from them.
Who are Angel Investors?
Angel Investors are high-net-worth individuals who invest in early-stage startups, and in return, they seek minority equity ownership in the company. Since wealthy individuals invest their own money in untested and unproven business ideas, so they take calculated risks on investment.
What they look for in a startup is how promising or innovative it is, the startup business model, the founder's competency and vision, and market potential. Promising startups with solid business ideas, unique value propositions, strong execution capability, and high growth potential are found attractive to them.
Angel investors provide various types of funding such as pre-seed capital, seed capital, or invest in early-stage startups. Not only do they provide financial backing to startups but they also offer mentorship and access to their networks.
Angel investors can be the best funding source for newly-founded startups or founders with a business idea.
How to Raise Funds from Angel Investors for Your Startup?
Here is the detailed step-by-step process to raising money from angel investors for your startup;
1. Preparation Stage: Prepare yourself to Raise Angel Funding
- Refine Your Pitch: Conduct thorough market research to develop a clear understanding of your target market size, who are your customers, and what their preferences are, and validate your product-market fitness. And accordingly, refine your investment pitch highlighting your business vision, products or service offerings, and your team’s competency and expertise.
- Know Key Numbers: Whether you are at pre-seed or seed stage or early-stage, you won’t have much operational track record so you have to prepare and present realistic financial projections to gain angel investors’ confidence. You have to anticipate business revenues, costs, your fundraising requirements and have a plan ready on how you will utilize the money invested by Angel investors. Your projected financial numbers must speak out loud about the financial viability of the investment proposal.
- Target the Right Investors: When you’re ready with the initial pitch and financial projection, you should search and target the right investors. Not all angel investors have similar levels of interest across industries or sectors. So, startup founders or promoters must spend time on research to find and target the right investor who might be interested in your startup.
You can be involved in angel groups, attend startup pitching events, and engage with incubators or accelerators to find angel investors.
2. Approaching Stage: How to Approach Angel Investors?
Introduce your startup to target investors by seeking referrals from your network, advisors, industry experts, or other business founders who have successfully raised funds. It adds to your business credibility and more investors will be interested in your startup.
Founders should also attend startup meetups, industry events, and other networking gatherings to gain attention from Angel Investors. Having a strong network opens the door for promoters to attract potential investors at ease.
While approaching them, you must be clear and concise about your business idea and vision. Angel investors may have many investment proposals in their hands so, your approach must stand out differently and appeal to them for investment.
3. Pitching Stage: Pitch Angel Investors to Raise Required Capital
Craft a winning investment pitch: The pitch deck is of paramount importance as it serves as a first impression to your investors. Your business pitch must highlight how your startup is unique when compared to already established players or competitors, what is your target market size, your team’s management and execution capabilities, the financial viability of your startup, and more.
A compelling pitch deck must have all the required information that an Angel Investor may seek to assess the viability of an investment proposal.
Not only you should your startup strengths but also be transparent on the potential challenges or risks and have the right strategy to deal with them.
All in all, a clear picture should be presented to target investors to help them make the right investment decision.
4. Due Diligence: Be Prepared for Due Diligence Assessment
Due Diligence: Angel investors who are interested in investing will conduct a due diligence assessment to investigate your startup’s financial, operational, and legal aspects. So, they expect you to provide the required set of documents including but not restricted to financial documents, legal documents, materialistic business contracts, key customers and supplier details, and more.
The due diligence assessment helps investors identify the potential risks of investing in startups.
- Financial Due Diligence: It includes analysis of the company’s historical performance, quality of earnings, revenue breakdown and cost structure, debt and equity composition, etc. Angel investors also assess the reasonableness of stated financial projections.
- Legal due diligence: Potential investors also analyze material business contracts, customer contracts, and agreements with suppliers, check compliance with applicable laws and regulations, check the founder and company’s litigation history, and more.
- Market Due Diligence: Investors review the startup’s potential market size, expected growth rate, and competitor analysis, and assess industry trends and risks.
- Management Due Diligence: Startups do not have a track record so, analyzing the management team’s competency is of huge importance as they can give wings to the company’s success. So, angel investors examine managers' backgrounds, professional credentials, management styles, and industry experience.
5. Finalize the investment deal from Angel Investors
Negotiation: Once the due diligence is done and they find the startup worth investing in. The startup founder and angel investor negotiate on terms relevant to company valuation, dilution of equity stake, board member seat, and other rights. Both parties mutually agreed and created a term sheet. Once finalized, they enter into legally binding contracts and complete all the legal documentation formalities.
However, if investors do not invest in the startup, then it is worth getting valuable feedback from them to secure funding next time.
6. Post-Funding Requirements
Once the startup secures angel funding, it must keep investors informed about business success and growth. Timely communication with them builds trust, and credibility, and maintains transparency to foster long-term relationships.
Angel investors also bring networking advantages to your company to accelerate your startup’s growth.
