The terms ‘Venture Capital’ and ‘Angel Investor’ are often confused. Both receive equity (basically shares in a company that is not publicly traded), from providing investments into private companies, but there are several differences.
Angel investors are individuals who have the ability to provide startups with a small to significant amount of capital. This capital is usually provided to startups in exchange for some equity in the business. Unlike venture capital firms, angel investors will not often require immediate returns and understand that growing a startup into a profitable business can take a long time. In order to make your startup as attractive as possible for an angel investor, consider the following:
Know your growth
Typically, angel investors look to 5X - 10X their investment. So, before contacting a potential investor, make sure you conduct enough research to confirm there is a sufficient return on investment for your angel. Investing in a startup can be a high financial risk, so ensuring this step gets you one step closer to obtaining funding.
Get it right — the first time
Once an investor see’s what you are offering, they are either sold or not sold on the idea. So, it is imperative that you are completely ready to present your business before you speak with them. Angel investors not only look for great ideas, but startups with a great team and track record for executing their business plan. If you have a proven method of obtaining a regular revenue stream, you are more than likely ready to speak with an angel investor.
Don’t wait for an angel to contact you
Nothing speaks louder than hustle and initiative. While you are preparing your pitch and finalizing your business plan, you should take some time to connect with potential investors. One way to do this would be to speak with your lawyer or accountant as they may know some wealthy individuals interested in your industry. You could also try to join an accelerator program. This puts you through a highly competitive selection process and provides great validation for angels. Lastly, you could visit various angel investors websites to get a better idea of what they are looking for. Here are some you can check out:
Start building relationships
If a random person walked up to you on the street and asked you for $5k, you would probably give them a funny look and walk away. So, why would that be any different than you asking an angel investor for funds when you haven’t met or barely know each other? The truth is — it isn’t — and you should start building a relationship with the investor before you ask for money. Not only will this increase your chances of funding, but just an opportunity to pitch your idea to them and receive feedback.
Research, research, research
So you’ve identified a potential angel investor or two — great — but now what? You need to learn as much as you possibly can about them. What are they investing in? Why do they invest?
So you’ve identified an investor, conducted research about them, built a relationship with them, and are now ready to ask for financial assistance. The next thing you should do, is prepare a brief, compelling story about your business — AKA your elevator pitch. The pitch will focus on the problem your product or service solves. Make sure you do your research about your industry and your competition — hopefully, better than the investor! It’s never a good idea to assume you know everything, so make sure you are prepared and open to advice and criticism!
It’s extremely easy to think your business is worth more than what it is. You see the value provided to your customers, and the hard times you and your team have made it through. But the truth is, money talks. And cash flow trumps all. While angels recognize there is always a potential for growth, they are investing in the value of the company today. Overestimating what your business is worth is one of the most common deal-breakers when dealing with angels.
Prepare for due diligence
You wouldn’t hire an electrician without reading a few reviews about them first, right? So why would an investor in your company be any different? Investors will more than likely want to review your financial statements, investigate any outstanding debt you/the business has, as well as the overall ownership make-up/legal structure of the company.
Venture Capital funds are managed through venture capital firms primarily made up of professional investors. The funds come through many different sources including individual investors, corporations and others. The types of business funded are small and medium sized ventures with a strong growth potential, and the investments are typically characterized as high-risk/high return opportunities.
Iowa Capital Investment Corporation, a state chartered independent not-for-profit corporation, maintains a listing of venture capital and angel/seed funds serving Iowa and has organized the Iowa Seed and Angel Network, a group of individual investment groups from across Iowa who meet quarterly to hear from companies seeking investment.