Startups today have access to a dizzying array of early-stage capital options. Everyone with money seems to be an angel investor.
Angel investing has become a cottage industry among celebrities, athletes, and tech titans who want to build new ventures. Television shows beckon entrepreneurs with angel funding. Websites such as AngelList, Gust, Angel Capital Association, and others offer to match founders and angels with common goals.
The Angel Capital Association estimates that 300,000 people have made angel investments over the past two years, which might be quite low. Family, friends, neighbors, and online strangers are all angel investors.
Entrepreneurs subsequently ask how to find an angel investor. But an equally important question is how to choose the right angel investor.
That might seem counterintuitive since angels hold the money and the leverage. However, founders owe themselves the same due diligence that investors apply to them. So here are some factors to consider when choosing an angel investor.
Make Sure Angel Investing is Right for You
Angel investors offer seed capital in exchange for equity in a business. According to the Angel Capital Association, they provide up to 90 percent of the outside funding that startups raise beyond family and friends.
Since both parties assume significant risk, and since angels prefer returns, angel funding might not be the right strategy for every entrepreneur. Before seeking angel funding, the Angel Capital Association recommends that founders ask themselves these questions:
- Are founders willing to trade some control of their company for funding?
- Can they demonstrate earnings potential over the next 3-7 years?
- Can they show investors clear and significant returns?
- Are they comfortable accepting investors’ advice or giving them access to decisions?
- What is their exit plan?
Consider Accredited Investors
The majority of angel investors are accredited investors, meaning they must meet specific qualifications established by the Securities and Exchange Commission. Accredited investors earn $200,000 annually ($300,000 for joint-filers) or have a net worth of $1 million. They also can meet professional criteria, such as holding certain investment licenses or serving as directors, officers, or partners in companies that sell securities.
Angel investors don’t have to be accredited, particularly if they make smaller investments in the $5,000-$10,000 range. Accreditation becomes more critical for entrepreneurs seeking six-figure seed deals.
Pursue Experience and Judgment
Angel investors look for these characteristics in their investments, so founders should seek them from investors. Entrepreneurs should choose experienced investors with successful track records, particularly in the founder’s industry.
Angel investors appreciate risk but aren’t gamblers. They expect a return. Entrepreneurs should seek angels with strong portfolios demonstrating a hit rate of common-sense investments with solid growth and successful exits. Flash can be enticing but often is fleeting.
Seek Out Experts
Many angel investors began as entrepreneurs, which makes them subject matter experts. Founders want those types of investors on their side.
Angel investors can provide more than capital. An angel who understands a startup’s business, product, and vision can offer invaluable insight. Tech entrepreneurs naturally gravitate toward tech angels who can improve their products, suggest testing options, and navigate the market.
These angel investors also might be better positioned to introduce founders to customers and other investors.
Angels often invest in what they know, and founders should capitalize on that expertise. Entrepreneurs should choose angels with relevant experience and contacts in their field. This represents added value.
Align Your Goals
Seed money tempts every founder but rarely comes without strings. Entrepreneurs must balance their funding needs and business goals.
Some angel investors want more than a return. They might ask for input regarding capital plans, a voice in product direction, a board seat, or decision-making authority. They also might have different exit goals (say, a sale or IPO) that conflict with a founder who wants to build a lifetime business.
Entrepreneurs should be transparent about their mission and ask for the same from investors. It might be better to find an angel with less money who shares your vision than one with deeper pockets who doesn’t.
Founders need angels to fund their startups and fuel their passions. They also must be thoughtful when sourcing investors. Entrepreneurs can make the most of angel investors by understanding how angels operate, choosing experienced investors, and ensuring their visions align.