By Jeff Werner – March 5, 2020
Does this scenario seem familiar?
You’ve spent countless months developing your prototype, gone into debt, and asked your family, friends and colleagues for favors and funds, all in an effort to make your entrepreneurial dream a reality. But it’s clear you need more money to keep your business growing. It’s time to find some angel investors.
Who are angel investors, and where can you find them?
Principally, there are three types of angel investors:
- Angel groups (investing clubs)
- Angel funds
Individual (independent) angels
This is the cream of angel investing. If you have access to enough individual angels to fill your capital round, you’re off to a great start. Individual angels principally invest based on an affinity with your mission and purpose. They agree with and can visualize your path toward success and they believe in your problem/solution premise. Most importantly, they believe in you.
While you will always need to present a viable case for an investment, (team, product or service, market size, go-to-market path, financial forecast, valuation, etc.), in the end it usually comes down to whether an angel has a good feeling about investing in you and your business. This is old-school sales. It’s well known that when people make a purchase, emotion plays a part. Likewise, people invest based on emotion, but they need facts and data to rationalize the investment. Make sure you’re ready to provide the rationalization, but always speak to the passion.
Angel groups (or investment clubs)
These are groups of angel investors who gather as a collective to see businesses pitch, but decide individually whether to make an investment. In my experience, these groups generally adhere to one of the following systems:
- a) They have a developed system that guides both the presenting businesses and the angel members toward a path to investment.
- b) They organize the pitch and allow individual angels and companies to figure out the next steps on their own without instruction and direction.
I believe the former is preferable if the system is well-organized and well-led. The latter rarely works out, despite being a good idea theoretically. There are just too many variables at play. For example, lifedistractions happen that can lessen the possibility of an investment as each day passes. If you find yourself pitching to an angel group that’s missing a well-formulated, cohesive investment path, make sure you’re ready to seize any opportunity that might present itself. You will need to be aggressive in driving the process.
These are groups consisting of angel investors who have put their money in upfront. I find this preferable to an angel group, because each fund has a budget and their mission is to invest in businesses like yours. Additionally, these groups often allow for “sidecar” investments, which enable each angel fund member to add additional money toward an investment in a company. For an early-stage startup, a successful pitch, followed by a clear due-diligence process can often lead to a big check, as well as the opportunity for an expansive network to tap for business success.
So how does this all work?
Individual angels are typically found by referral. If you are lucky enough to get one or two to invest in your company, you may get referrals to other individual angels. Rarely will an individual angel look at a company on a cold call, nor will they typically seek out the next best thing. A “warm” referral makes all the difference. After all, if an investor’s friend or colleague bought in, that’s a valuable endorsement of you and your business.
Of course, it takes that first investor to start the process and that’s not always an easy thing to accomplish. People rarely like to be the first one to write a check. So how can you make this happen? Perseverance. Keep at it. Keep listening to feedback and refining your pitch. With determination and a bit of luck, it can happen.
With regard to angel groups and angel funds, the first step is to do your research. Go to the group’s website. You should always see a clear application process. If you don’t, leave the site. The lack of professionalism should cause you to run the other way.
Many of the angel groups and angel funds I’ve seen use platforms such as Gust for their application process. Generally, there’s a screening process followed by a pitch to the membership. Following the pitch, the process then differs between the angel group and the angel fund.
A well-organized angel group will guide interested members toward a discovery and due-diligence process, which could lead to some investors writing a check. Depending on the size of the group and the amount of interest in your company, the range of investments can be small to moderate – in the five- to low six-figure range, for example. The timeframe for investment can vary depending on the leadership style and culture of the group.
An angel fund operates differently. It may have a management team that will unilaterally decide on investments, or it may have a more democratic system that allows members to vote collectively on whether to begin the process of investing in a particular company.
Although the angel fund process can be time-consuming and cumbersome, often a successful outcome will lead to a healthy six-figure investment.
There’s more to say about the distinctions among these types of angel investors. Please keep an eye out for future articles.
Jeff Werner, CEO of The Field Group in Beacon, is a business adviser, investor and mentor who focuses on capital acquisition, expansion strategies and resource allocation. He is a founding partner of Cheerity, a social media-based technology company in New York, and his portfolio includes a select group of Hudson Valley startups, including Loliware, the edible bioplastics company. Werner sits on advisory and director boards of Our.News and Orto Foods Inc., and is a managing member of the Hudson Valley Startup Fund, a member-managed seed capital fund. He can be reached at email@example.com.