Are you looking for an angel to help your startup? If so, you might be in luck. More than 300,000 angel investors have made investments in the last two years, according to the Angel Capital Association (ACA) estimates. This guide helps you understand how angel investors work and how to find an angel investor for your company.
What are Angel Investors?
An angel investor is an individual with a high net worth and is often a current or former entrepreneur. They invest their own money. Compare this to venture capital (VC) investors who risk capital companies employ to invest other people's money.
Angel investors invest in startups because they can get higher returns than they might from public stocks, bonds, or mutual funds. Money isn’t the only motivation for angel investors, though. They might also invest for social reasons. For example, female investors are twice as likely to invest in businesses with female leadership or make a positive social impact.
What are accredited investors?
Accredited investors are defined by Rule 501(a) of Regulation D. The U.S. Securities and Exchange Commission (SEC) defines an accredited investor as someone who meets the following criteria:
- Any person who has an individual net worth (or a joint net worth with a spouse or spousal equivalent) of more than $1,000,000
- Any person with an individual income of more than $100,000 in each of the two previous years and has a reasonable expectation of reaching the same income level in the current year. The income threshold is $300,000 if combined with the individual's spouse or spousal equivalent.
- Any person holding one or more professional certifications, designations, or credentials from an accredited educational institution that the Commission designates as qualifying the individual for accredited investor status
- Any person qualifying as a “knowledgeable employee” under the definition in Rule 3c-5(a)(4) under the Investment Company Act of 1940 (17 CFR 270.3c-5(a)(4))
So what’s the difference between an angel investor and an accredited investor? While most angel investors are also what’s known as accredited investors, the two terms aren’t necessarily interchangeable. Learning more about what angel investors look for gives you the best chance to secure funding from them.
What Angel Investors Seek
Regardless of each angel investor’s exact motives, they’re likely to look at each of the following before they provide funding for your startup:
- Rapid Growth – People want to invest in companies that can succeed. That means they want to see that yours is heading in the right direction, or at least poised for growth.
- Leadership – Investors like to see strong leadership teams with relevant experience or skills. Depending on their social motivation, they might look at more than your work experience.
- Early Results – You have an advantage if you can show that you’re already achieving desirable results. For example, maybe you’ve already built a minimum viable product and received positive feedback from early users.
- Long-Term Strategy – Angel investors might ask about your mindset or strategy for the future to assess whether you’re prepared for the long haul.
- Risk Analysis – Investing in a startup is risky, and potential angel investors want to see if you've thought of everything. This is like being asked about your biggest weaknesses in a job interview. People don't necessarily need to hear that there are no risks or weaknesses. They want an honest, realistic assessment and your plan for overcoming risks.
- How You’ll Use the Investment – Before angel investors hand over large sums of money, they like to know exactly where that money is going. Are you hiring a team, buying inventory, spending on marketing, renting office space, or something else?
- Valuation – Investors need to get an idea of how much your company and product or service is worth. They like to see transparent numbers about your assets, debts, and anything else that helps them get an accurate valuation.
If you know what angel investors are looking for in a startup, you have a better chance of securing funds from them.
Pros of Using Angel Investors
There are numerous benefits of working with angel investors. Because an angel investment isn't a loan, there's no expectation of repayment, at least not every month. Angel investors get their money back during later rounds of funding or acquisition. Angel investors are also willing to take risks banks aren’t, which helps if you’ve had trouble getting a loan.
Angel investors often give more to a startup than money alone. Because so many angel investors are former or current entrepreneurs themselves, they usually have experience that can guide your growth. Angel investors are likely to be incredibly committed, especially when they believe in your vision and mission. As a result, they'll be inspired to support you for more reasons than their financial gain.
Cons of Using Angel Investors
While you might not have to repay angel investors monthly, startup founders have to exchange equity. If your investor is especially hands-on, this might mean giving up some control of your business. And even if angel funding makes sense for your business, it can be hard to find an investor.
How to Find Angel Investors
Finding angel investors is easier if you already know the right people. If you don't, however, you might want to look into an online investment platform like Angel Investors Network. Otherwise, you might want to look at your competition and see how they were funded.
How to Win an Angel Investment
A persuasive business plan is one of your biggest resources when connecting with a potential angel investor. Your chances are the best when you can provide the most detail about your startup to prove that you’re thinking of everything. If you can build a functional prototype to demonstrate, that’s even better.
Get the Most Out of Your Angel Investor
Angel investors are a valuable source of startup funds, but it’s important to consider the benefits and limitations before jumping into an agreement. If an angel investor does make sense for your business model, the right pitch makes all the difference. Bubble offers powerful no-code tools to help you bring your idea to life and win angel funding.
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Millions of users are building and launching businesses on Bubble — many have gone on to participate in top accelerator programs, such as Y Combinator, and even raised $365M in venture funding. Bubble is more than just a product. We are a strong community of builders and entrepreneurs who are united by the belief that everyone should be able to create technology.