Angel Investor could be a term you have heard in blogs, on the news, and in some of your favorite movies as well. Many popular companies including Facebook have had angel investors. But don’t feel terrible if you’re still wondering what an angel investor is.
This article will take you through the basics of angel investors, the pros and cons of angel investors, and what they look for in a startup before investing.
Who Is An Angel Investor?
Individuals who aim to be in businesses at their earliest stages are known as angel investors. They invest their money in start-ups to help them get off the ground. In exchange for their investment, they obtain an equity part in the company or convertible debt. Most angel investors have extra cash and are looking for a higher rate of return than standard investment possibilities can offer.
Unlike venture capitalists who are looking for high-return investments, angel investors are more interested in helping an idea or a concept or a founder they genuinely believe in receiving the funds they need to turn their dream into a reality. As a result, angel investors are frequently- but not always- people who the company’s founder knows personally.
Pros of having an Angel Investor
The main benefit is that angel investment finance is far less risky than loan financing. Invested capital, unlike a loan, doesn’t have to be repaid if the business does not work. Banks are hesitant to lend money to new and fresh firms/start-ups which is why getting some loans at the beginning could be quite challenging.
Additionally, angel investors are always seeking a personal opportunity as well as a financial opportunity.
Cash flow is the same way, if you want to get a loan from banks for your business, your company must have a track record of positive cash flow and profit. On the contrary, angel investors are more interested in where your company is headed. They may not care if you haven’t made any profits in the last two years.
Cons of having an Angel Investor
The loss of complete power as the only owner of your company is the biggest con of having an angel investor. Your angel investor will now have a say in how the company is operated. He/she will also be paid a certain percentage of the earnings if the company is sold. With debt financing, the lending institution has no control over your company’s operations and receives no profit share.
An angel investor can increase the amount of pressure you’re under. When you’re investing your own money, the stress is solely on you to succeed. Then, when you bring in an angel investor, you’re immediately under pressure from outside factors, such as the individual who put their faith in you and invested in your firm. That stress may have an impact on how you create and run your company.
Things Angel Investors Look For When Making Investment Decisions
It is obvious that angel investors won’t put their money in your company without seeing anything special or beneficial. There is a list of things they look for before jumping into the decision-making part. We’ll give you 10 major things to work on that will immediately bring you an angel investor from heaven.
1. Management Team
Often, investors are more interested in the team behind the company than the service they offer or the product they manufacture. They believe that if the team is well-trained and has the necessary amount of knowledge about the market as well as the product they are trying to sell, they will achieve success.
However, no matter how good your product is or the services you offer if you do not have a good human resource, your team will not able to generate long-term sales. Investors also consider whether the CEO and his team are pleasant to work with and if they are trustworthy.
You can also try and bring some experienced consultants to help with the team issues and bridge the gap between them.
2. Business Plan
The most appealing answer an investor wants to hear from you is: how will I profit from my investment? It is important that you be transparent about the calculated amount of risk involved in your plan.
Angel Investors are looking for a good business model with monetization, scalability, and a credible exit strategy. They prefer a plan which allows their say in the process. Angel investors are well aware of the risks associated with backing a firm; don’t jeopardize your reputation and trustworthiness only to impress them.
3. Financials and Key Metrics
The heart of Business is finance, and without it, they would not be able to expand and survive. As a result, having appropriate financial knowledge is a basic criterion for a CEO who plans to establish a business and is capable of communicating them logically.
This includes estimations for the business’s monthly burn rate, gross margins, predicted growth, customer acquisition cost, gross revenues and expenses, KPIs, EBITDA, and so on.
Do your research. This might seem overly basic, but entrepreneurs who look for a specific list of ideal investors for their products have always managed to achieve more success. Many angel investors choose a particular industry, and angel investing clubs revolve around a specific niche.
A personal and targeted pitch not only attracts ‘smart money’ but also avoids you from destroying future ventures through a mass pitching approach.
5. Funding and Progress
Angel investors will want to know how you plan to use their money to work. This may involve providing them with a measured burn rate so that they can know when you will require additional funding. This will help to determine if your fundraising plans and estimated costs are realistic and reasonable.
6. Investment Options
When it comes to investment options, angel investors want clarity and flexibility. They can choose to give cash in the form of warranted loans or a stake in the company on a more regular basis. The investment option must be designed in such a way that it can handle any equity investments.
Owners must be comfortable sharing some power with the investor. The ideal answer is to present the investor with a legally binding written shareholder agreement that explains all of the investment’s risks.
7. Competitor Outlook
Investors are well aware of the dangers that any firm faces in terms of competition. As a result, customers are keen to hear how a company intends to compete and differentiate itself from the competition.
8. Commercial Traction
Showing investors that you’re not just talking but taking actions as well to expand the business is a crucial method to de-risk an investment opportunity. Demonstrating that the market is already interested in your idea and providing helpful feedback will make your startup stand out among many others that are in the work progress.
9. Intellectual Property
An angel investor will want to check for patents, copyrights, and trademarks as well as ensure that no third-party rights are being infringed upon. They wouldn’t want any sort of legal risk involved in the business.
10. Market Size
Many investors are on the lookout for fresh opportunities to ensure a company’s long-term growth potential. As a result, it is crucial to understand the regional market and its importance to the startup’s product or service.
In conclusion, it is clear that angel investors look for quite a number of things before making their decisions. To make a successful pitch, all you can do is focus on the major things they look for and prepared yourself.
Make sure you spend your time and money on finding the right investor for your company!