Angel investors invest in early stage or start-up companies in exchange for an equity ownership interest. Angel investing in start-ups has been accelerating. High-profile success stories like Uber, WhatsApp, and Facebook have spurred angel investors to make multiple bets with the hopes of getting outsized returns.
Who is Angel Investor?
An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors invest online through equity crowdfunding or organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies.
Here are my thoughts on frequently asked questions from entrepreneurs about angel financing.
- How much do angel investors invest in a company?
The typical angel investment is $25,000 to $100,000 a company, but can go higher.
- What are the six most important things for angel investors?
Here is what angels particularly care about:
- The quality, passion, commitment, and integrity of the founders.
- The market opportunity being addressed and the potential for the company to become very big.
- A clearly thought out business plan, and any early evidence of obtaining traction toward the plan.
- Interesting technology or intellectual property.
- An appropriate valuation with reasonable terms.
- The viability of raising additional rounds of financing if progress is made.
- What do angel investors like to initially see from an entrepreneur?
- A clearly articulated elevator pitch for the business.
- An executive summary or pitch deck.
- A prototype or working model of the proposed product or service (or at least renditions).
- Early adopters or customers.
- How long will it take to raise angel financing?
It’s my rule of thumb that it will always take longer to raise angel financing than you expect, and it will be more difficult than you had hoped. Not only do you have to find the right investors who are interested in your sector, but you have to go through meetings, due diligence, negotiations on terms, and more. Raising capital can be a very time-consuming process.
- What financial questions should the entrepreneur anticipate from angel investors?
- How much capital are you raising?
- How long will that capital last?
- What will be your monthly burn rate?
- Do you have detailed financial projections for the next two years?
- What are the key assumptions underlying your projections?
- What are key cost components there for the product or service?
- What is the unit economics?
- What are the likely gross margins?
- What questions should the entrepreneur anticipate about marketing and customer acquisition?
The angel investor will want to get a sense of how the company plans to market itself, the cost of acquiring a customer, and the long-term value of a customer. So the entrepreneur should be prepared for the following:
- How does the company market or plan to market its products or services?
- What is the company’s PR strategy?
- What is the company’s social media strategy?
- What is the cost of a customer acquisition?
- What is the projected lifetime value of a customer?
- What advertising will you be doing?
- What is the typical sales cycle between initial customer contact and closing of a sale?
- What questions should the entrepreneur expect concerning the management team and founders?
- Who are the founders and key team members?
- What relevant domain experience does the team have?
- What are key additions to the team needed in the short term?
- Why is the team uniquely capable of executing the company’s business plan?
- How many employees do you have?
- What motivates the founders?
- How do you plan to scale the team in the next 12 months?
Entrepreneurs can be optimistic about raising financing from angel investors, as highly publicized success stories are encouraging more angel investors to commit capital to start-ups.