Angel investors are wealthy individuals who use their own money to invest in private companies. This is different than venture capitalists, who use pools of other people’s money to invest (although VCs may also have a little of their own money in the game). Angels are often former entrepreneurs who made money by founding, growing and selling their own company or, in the case of serial entrepreneurs, companies. Or, they may be retired executives or people who inherited wealth.
The term “angel” has its origins in the world of Broadway Theatre. They were originally wealthy people who financed theatrical productions. There are approximately 500,000 active angel investors in the United States.
Most angel investors are interested in more than just a nice return on their investment. Sure, they want to make money – that, at the very least, is the way we keep score in the game of investing. But, they are often driven to add value to the companies in which they invest – to act as a mentor, sometimes forging very close relationships with founders. They won’t want to work in your company daily from 9 to 5, but they probably won’t want to make an investment and never talk to you again for years. Besides offering advice, they may be a great source of contacts for potential customers, partners, and other investors.
How angel investors work
Angel investors are all different. While some angels are looking for companies that have a little operating history and traction in the marketplace, you will generally see angels involved in very early-stage companies. The early money angels put into a company is generally referred to as a “seed round.” The only other money in the company at the time of the seed round, is money from the founder, friends, and family. Most angels target particular industries, ones in which they have prior operating and investing experience, although there are opportunistic angels who will look at just about anything.
In recent years it has become quite common for angel investors to take convertible debt in their portfolio companies, rather than regular equity ownership. To a large degree this is a response to the enormous number of regular equity investments that angel investors had wiped out following the dotcom crash in 2001. The convertible note will be exchanged for equity at the time of the next round of financing. There is almost always a price discount given to the angel investor so that, for example, if the equity prices at $2.00 per share in the next financing round, the angel may receive the equity at $1.50 per share. Discounts are generally in the 20%-30% range. Convertible note deals are used because they are quick and not super expensive compared to equity deals, which often entail lengthy negotiations around valuation. And, in addition to saving time, not having to work through valuation allows the parties to punt the maddening exercise of having to justify the valuation for a startup.
Finding angel investors
Angels are all around you, guarding and protecting you. Seriously, angel investors may be nearby. After all, they are regular people. But, they probably aren’t spending much time trying to protect you. They tend to not advertise themselves aggressively, preferring to be introduced to compelling investment opportunities through their network of lawyers, CPAs, executives, and other angel investors. You can imagine that if everyone in your community knew you were wealthy and looking for opportunities to hand that money out, you’d likely be overrun by people knocking on your door. Besides being annoying, it’s time consuming to vet all those deals. To avoid this, angel investors allow other people to screen the deals and only send them the ones that look promising.
There are a lot of angel investor networks, which are groups of angels that meet to talk about and share deals and ideas. Many of these networks have pitch days where entrepreneurs can come and pitch their companies and ideas. If you do a search for “angel investors” on the Internet, you’ll find some of these networks.
How we can help you land an investment from an angel
We make angel investments from time to time, although we are not always active. More significantly, we maintain a robust network of angel investors who welcome deals that have been pre-screened and meet their criteria.
We are happy to make introductions to angel investors if your company meets their investing criteria. To do that, we need to understand your deal. So, we will ask a lot of questions. To some degree, we are acting like gate keepers. That is not because we don’t want to help you. We do! But, we need to protect our network and be careful we don’t send them deals in which they have zero interest. We may suggest to you that you polish up your deal. In other words, we may advise that you rework your pro forma numbers or spruce up your pitch deck. Do not be offended – we are only trying to help!
Our affiliated company, The Startup Shepherd, provides mentoring and consulting services to help ready you to pitch angels. One great option for your company is their “2&1 Review.” A current angel investor and former venture capitalist spends two hours reviewing your business plan/pitch deck and pro forma numbers, including outside research on your industry and competitors. They then provide a one-hour feedback session. We can’t promise you that you will then be a candidate for introduction to our angel network, but we can promise you that the time and money will be well-spent.
Want to talk about the “2&1 Review,” angel investors or anything else related to small and growing business finance.