According to Brian Cohen and John Kador, authors of the book, What Every Angel Investor Wants You To Know, “An angel investor is an individual who, using his or her own money, provides early stage startup capital to a new business and expects a percentage of ownership equity in return with the expectation of a sale or ‘exit.’” (Because angel investors are looking for an exit, very few startups—some say as few as only two percent—would be a good fit.) While friends, family, and even some crowdfunding platforms offer investment for equity, the percentage of businesses that have a model that would be interesting to an angel or venture capitalist is very small.
Angel investors often take a more personal approach to investing and typically become involved during the earliest stages of a small business they believe will provide them a good return on their investment. And, often take an advisory or mentorship role with the entrepreneur. The investors on ABC’s Shark Tank are a popularized version of an angel investor. Although they often are engaged with a start-up before other equity investors like a venture capital firm might be, they are looking for the same, or at least similar companies—those that can scale and grow quickly with the infusion of additional capital. (To learn more about equity financing, take a look at our Guide to Equity Financing.)
The term “angel” derives from the Broadway Theater, where the private investments of wealthy patrons made many lavish productions possible. Like today’s angel investors, they felt like they had a good eye for talent and could pick a winner.
What Are Angels Looking For?
Because they are often investing in companies that haven’t established themselves in the market or have a demonstrable track record, angel investors look at some pretty specific fundamentals before they invest in an entrepreneur.
- They are looking for a great leader: In reality, an angel is investing more in the entrepreneur than anything else. Although the case for your product or service is important, an angel wants to know you, and your team, have what it takes to leverage a capital investment into a profitable company. In fact, according to Cohen and Kador, in addition to the ability to meet objectives and get things done, personal characteristics like integrity are some of the most important characteristics they look for. “Integrity comes first for most investors. For me, it’s a deal-breaker. If I’m not absolutely, positively persuaded that you—and the startup’s management team—have a track record of integrity, I will not invest, even if you could guarantee—which you couldn’t—that my investment will absolutely, positively pay off.”
- They look for management experience: Building a startup organization is a demanding responsibility. Most angel investors want to know that you either have experience building a team capable of meeting objectives or can learn how to do it very quickly. If you can demonstrate that you have the ability to build and lead a successful team, you’ll have better luck convincing an angel to invest in you.
- They want to know that you understand the market: Domain expertise is critical. Angels want to know that you understand the competitive landscape, have a clear understanding of what your potential customers are looking for, and have an in-depth knowledge of the technical challenges associated with the space.
- They want to know that you have the skills to execute: It’s not enough to know the space cold. Angels want to know you have skills to build a leadership team, can execute a marketing plan, can build a sales team, and a finance team. Very few people have all these skills, so pretending you do won’t go very far with an angel. Knowing where you may need extra help will allow you to find the right people to compliment your skills, and will give you credibility with an investor.
“No” can be a great opportunity to learn
It’s likely you’ll hear a few “no’s” as you pitch your idea to investors. Because part of the reason most angels invest in startups is they want to see entrepreneurs succeed, they are often willing to explain the reasons they don’t want to invest in your company. Don’t take it personal, but make it a learning opportunity. Listen to their objections and create a plan to address them for the next time you pitch your company to an angel.
There may also be angels you don’t want investing in your company. Unlike a loan, an angel is a partner in your success. As well as putting your best foot forward so they can evaluate you and your business, you should also be evaluating them to make sure you want to have them on your team.
Begin with the end in mind
As mentioned earlier, angels invest early-stage startup capital in a new business for a percentage of ownership equity and the expectation of a sale or exit. Angels often want to see the exit plan before they’ll invest any capital. Is the goal to go public or to be purchased by a larger company? If your plan is to build a company that will provide a living for you and your family for years to come and you have no exit strategy, your business might not be a good candidate for an angel investor.
An exit event is usually the only way angels get paid.
According to Cohen and Kador, “YouTube was just two years old when Google bought it for $1.6 billion. Flickr was a year and a half old when Yahoo bought it for $30 million. Instagram was also just two years old when Facebook acquired it for $1 billion. In 2005, a startup called iStockphoto emerged as a leading source of crowdsourced images. Getty images, the 800-pound gorilla of the stock photo market, bought it for $50 million. Since then, Getty has bought more than 100 other photo collections and companies.”
If you’re looking for an angel investor, it’s getting a lot easier to find one today than it was just a few short years ago. Angelist, TechCrunch, and Gust are online communities that try to match startups with investors. Your local university is another good place. There are also groups like The New York Angels, where Brian Cohen serves as chairman. A Google search in your area for angel investors will likely reveal groups closer to your business.