Angel investors usually invest in startups and early-stage business developments. However, they are also known for investing
in companies that are struggling financially and need capital for survival and/or
Initial stages of a company’s development
- In the seed phase of a company’s development, a marketing concept may already exist
but a prototype of the business idea and business plan have not been implemented
yet. There is also no management team at this stage.
- In the start-up phase of an enterprise, a prototype of the business idea has been
developed and the business plans and marketing strategies have been proposed.
- The first/early-stage of a company’s development occurs when a new business has
successfully launched their prototype and mass marketed their innovative business
ideas. During this stage, new business owners have also recruited members of their
management team to assist in moving the company forward.
How an angel investor can help
All entrepreneurs may experience obstacles during the initial stages of a company’s
development; therefore, they are encouraged to work with advisors who have experience
in the industry in order to ensure their company’s success. Experienced angel investors
tend to be patient, risk-tolerant, and willing to mentor and guide new entrepreneurs
during these challenging times.
Obtaining angel capital is not an easy process and can be extremely competitive.
An entrepreneur can follow several strategies, so they can increase their chances
of receiving angel funding. Angel investors
primarily look for 6 important components when agreeing on an investment:
1. The promise of a large ROI
Angel investors expect more than just getting their money back—they also seek a
profitable return on an investment since their investments tend to be high risk.
As one financial analyst claims, “For every dollar that an angel puts into a company,
s/he would like to take seven dollars out after taxes in seven years.”
2. The rationale behind every investment
Angel investors have a history of being successful entrepreneurs and many are delighted
in helping build and create an enterprise that will promote the economic development
of a community. Entrepreneurs should give angel investors a legitimate reason to
invest in their company and cherish the skills and expertise an angel investor will
bring to their enterprise.
3. A promising pitch and convincing business proposal
An entrepreneur should consistently practice and refine their pitch so it will be
flawless. In addition to presenting a promising pitch, angel investors also desire
to see an entrepreneur’s business plan, detailing the ideas and objectives of their
company. This business plan should include any financial projections, comprehensive
marketing plans, concise details about the target industry, and who the prospective
consumers will be.
By preparing a flawless pitch and strong business proposal, the entrepreneur will
undoubtedly increase their chances of obtaining
angel capital. They should also tailor their pitch and business plans according
to the type of angel investor they are planning to pursue. There are three major
types of angel investors that business owners should be aware of.
- a. Angel investors concerned with economic gain- these investors are motivated by
the prospect of a large economic reward, especially if the company gains public
recognition. Entrepreneurs who seek these types of angel investors should not only
stress the purpose of their business idea(s) but also mention shareholder percentages
and ROI in their pitch and business plans.
- b. Hedonistic angel investors- these investors are attracted to investing because
of the thrill associated with risky ventures. They also believe that the entrepreneur’s
concepts are worthwhile and desire to help the entrepreneur market their innovative
ideas. While the process of successfully obtaining angel capital is an extremely
competitive process, new business owners who
seek funding from these investors should have a well-prepared, convincing
pitch and business plan.
- c. Altruistic angel investors- these investors take pleasure in helping young companies
thrive and enjoy promoting community development and job growth. Entrepreneurs who
seek capital from these types of investors
should perhaps stress the advantages of economic growth in communities and economically
4. A solid management team
To attract angel investors, an entrepreneur must also present a solid and trustworthy
management team that is skillful, competent, and experienced in their industry.
The entire team should have a firm record of success, be knowledgeable on marketing
products and services, managing employees, and have insight on conducting proper
financial matters. It is a proven fact that a strong management team can contribute
to the successful growth of a company.
5. Proper business structure and organization
An entrepreneur’s business must be properly structured for investment. This includes
an angel investor’s percentage of ownership as part of the business deal. Angel
investors are also likely to be involved in company operations through active mentoring,
management, or being a member of the board. Most angel investors will expect this
type of formal agreement, as well as a large return on investment, in exchange for
providing the new company with the needed business capital.
6. A well-defined exit strategy
The entrepreneur and angel investor should agree upon a time frame for the investment.
This means that for a given period of time, the angel investor will provide the
needed capital, expect to be actively involved in a company, and will anticipate
an exit after that phase comes to an end. The most common exit strategy of an angel
investor is through the sale or merger of a company.
Angel investors usually reject about ¾ of investment proposals each year. Their
decision is largely based on a lengthy application review process. Every entrepreneur
seeking angel capital must successfully go through all of these stages before they
are able to obtain funding.
1. The application process
Many angel investors expect all prospective entrepreneurs to fill out a formal application
form, while others may just seek an executive summary of the business proposal.
The entrepreneur is responsible for contacting any potential angel investors in
order to find out all of the necessary documentation requirements for their application.
2. The pre-screening course
During this stage in the angel investment application process, the application pool
is expected to limit considerably. Prescreening of candidates will eliminate the
applicants who provided incomplete submissions, did not meet the minimum requirements
of the angel organization, and/or did not properly comply with the investing preferences
of the angel investors involved. This process usually takes anywhere from 1-2 weeks
after the initial presentation of the application.
3. The screening process
Of the abundance of submissions received, less than 25% of all applicants will be
approved for screening. During this part of the application review, angel investors
will usually request from the entrepreneur their comprehensive business plans and
may even decide to meet at this stage. This competitive phase is usually completed
within three weeks of surpassing the prescreening period.
4. The in-person meeting
An entrepreneur is considered to be extremely lucky to be able to reach this point
of the review process since obtaining angel capital
is a competitive practice. During this stage, they will be invited to personally
present their pitch and business proposals to the angel investors. After they present
their pitch and all presentation materials to their audience, a question and answer
session will usually follow. These investment meetings are held on a monthly basis.
5. Due diligence
Investors who are interested in an entrepreneur’s business plan, along with industry
specialists, will conduct a comprehensive assessment of the proposed business strategy.
They are also expected to perform a background check of the entrepreneur and pursue
any references in order to validate their credibility as an honest business owner.
During the due diligence period, additional cuts will be made. It has been estimated
that less than half of all companies that have successfully reached this stage will
actually be funded. The due diligence process can continue for several months.