10 Essential Tips For New Angel Investors
Sometimes angel investors are referred to as real angels, sent to assist us in funding activities that would not otherwise be possible. They bring new ideas to life by acting as guardian angels of innovation.
Many of us aren’t aware of what angel investors look for when they are deciding whether to invest in someone, an idea, or a company before they decide to invest. Could it be more of a matter of who plays in the team or about how effective the pitch is? No matter how they determine to fund, the processes they use to assess it remain a little mysterious, a sort of deus ex machina of the world of business.
Listening to individual investors‘ opinions is a great way to gain a better understanding of how they think and how they operate. Many of them now maintain blogs, which provide much more insight into their minds than simply showing off how well they invest in a company they invested in.
As you meet entrepreneurs who are pursuing their ambitions and building firms that have the potential to change the world, you will be inspired, and often at considerable risk to themselves, you realize the importance of entrepreneurship to the world.
Even better, you get to be a tiny portion of that thrilling trip when you make payment.
The angel market in the United Kingdom and around Europe seems to have stayed vibrant despite Covid-19 and the economic instability it has produced, which may be a measure of how much angels like what they do. Indeed, because more entrepreneurs effectively exit their businesses, a new generation of investors is entering the market. This is great news for anyone wishing to invest in early-stage companies.
Who are angel investors?
New entrepreneurs can obtain financing from angel investors easily. An entrepreneur can invest in the early stages of development with people he or she knows or is completely unknown to, and they are motivated by profit potential. Individuals or high net worth individuals who act as angel investors provide financial support and funding to startups without an ownership stake. Entrepreneurs are usually related to each other through family or relatives. An entrepreneurial investor who invests between $25,000 and $5 million in startup companies, also known as a business angel or angel funder. Because of the high unforeseen failure risk, many investors and banks are cautious about investing at the startup stage.
Importance of Angel Financing
- Through the provision of risk capital, angel investors play a critical role in helping the economy grow and technology advance.
- Focus is more on the founders’ commitment and passion and on opportunities they see in the market.
- Angel investors are providing a significant amount of early financing to startups because they offer relatively easier interest rates than venture capital. A large number of small deals cannot be accommodated by venture capital funds that require rapid revenue growth. Because of its risk level and handling costs, bank lending is not the preferred source of startup and early-stage financing.
- Angel investors are most often the first and foremost investors in startups, influencing their success and failure. This is especially true in the early stages of the company.
- Due to the limited interest in giving back their money or generating returns, professional angel investors search for acquisitions or IPOs with an exit strategy.
- Investing in a successful portfolio yields an effective internal rate of return of 20% to 30%. Entrepreneurs and investors, who provide the most funding, will benefit from this. So angel investments are ideal for entrepreneurs in the beginning stages of their businesses who are financially struggling.
Angel Investor Involvement
Besides investing money, angel investors contribute valuable knowledge at critical junctures. Angel investors typically have a well-versed industry background or are executives who help startups get started.
The majority of angel investors do not even earn a million dollars. Instead, they earn $50,000 to $100,000 a year.
Increasing numbers of angel investors have been seen in recent times, which is due in part to the fact that angel investors are not simply motivated by monetary returns. Angel investors are looking for a founder that is motivated and enthusiastic about his company to capitalize on the large market potential that they have recognized. They want to mentor and afford to support the next generation of entrepreneurs, and they want to use their knowledge and network to help startup businesses succeed.
How Much Do Angel Investors Typically Invest?
Entrepreneurs may struggle in the early stages of their companies since they aren’t attractive to venture capital firms, but angel investors provide small-scale finance to cover costs during that time.
Because typically, venture capital firms become interested in investing in a startup only after it has utilized the angel investor’s investment and grown some.
Depending on the startup’s profitability and growth requirements, angels invest vastly different amounts. An average angel investment round is between $100,000 and $250,000, raised by 3-5 people. Individual investments typically range between $5,000 and $150,000.
Angel investment can also reach $1 million on rare occasions. In most cases, large amounts of capital are raised through angel investors investing in groups or syndicates, which combine their financial and entrepreneurial skills.
What do angel investors get for their investment?
The price of a startup that angel investors normally invest in is quite consistent. They often invest in firms worth between $1 million and $4 million, with anything worth more likely to garner venture capital funding.
Having said that, the business’s valuation is irrelevant at this point. Since they put in a $2 million firm rather than a $1 million one, angel investors don’t make big money. Rather, they profit when the firm in which they invested succeeds.
As a result, you shouldn’t stress over deal conditions when investing. Instead, concentrate on determining the possibility of that firm expanding and succeeding.
Entrepreneurs should avoid angel investors who seek to gain control or a majority stake in their startups. Entrepreneurs must own a large share of the business to be incented to grow it, which is why angel investors usually do not hold more than 20-25% of the shares.
Advantages of Angel Investing
- Financing of angel investments is significantly less risky than taking loans, which is one of the main advantages of angel investors. A business that fails cannot repay investment capital, unlike loans.
- Angel investors provide startup companies with capital.
- Many jobs are created by angel-funded companies.
- Returns from portfolios are often reinvested by angles.
- A growing number of companies are being born from the wealth created by angel investing.
- Creating wealth and jobs are two different things.
- Business acumen, director service, vertical expertise, and financial experience define the portfolio expertise of angels.
- It is likely that angel-funded companies will survive for at least four years and then raise additional funding outside the angel group.
- The firms are to display significant improvements in web traffic and website rankings as well as improved venture performance. This can range from 30 to 50%.
- There are practically angels in every industry, and they do not charge high monthly fees.
- A new company can also gain valuable knowledge and experience from angel investors.
Here are ten crucial guidelines from a decade of angel investment if you’re planning to start to write some angel checks.
Tip 1: Before you start investing, decide on your approach.
When you execute your first investment as an angel investor, you must have a plan and strategy in place.
It doesn’t have to be difficult, but it should include the essentials. It should include information such as:
- Time commitment: do you have enough time to spend on angel investing? Will you be a hands-on investor or more of an armchair investor?
- Investment strategy: will you concentrate on a specific sector, technology, or functional area?
- Deal trying to source: how will you generate business? Are you going to find them on your own, or will you use a syndicated strategy to benefit from other people’s deals?
- The amount you’ll put in: how much angel money will you put in and for how long? Are you planning to save any money for subsequent rounds?
- Deal size: do you have to go for bigger deals where you’re the primary investor or smaller deals where you’re a co-investor?
- Diversification of your portfolio: how many transactions do you wish with your available funds? For optimal portfolio diversity, a minimum of ten agreements is recommended.
Tip 2: Planning, Startups, and Stories
His life has been dedicated to small businesses since he founded and became the chairman of Palo Alto Software. In addition to this website, he has a lot of other ventures and investments.
He provides lots of business advice in his blog, and he has hands-on experience in angel investing. Aside from investing, Tim Berry offers advice for investors and those looking to make their first angel investment.
Tip 3: Market size and market growth must be large.
Market size and growth are important for startups. Even if a company outcompetes its competitors, it may not be able to become a large company since it is so focused. Strong metrics and extensive market knowledge are traits of the best companies to invest in. ARR (annual recurring revenue), MRR (monthly recurring revenue), and TAM (total addressable market) are important metrics.
It is important to make sure the product has an ongoing and large market demand for the company to generate a steady stream of ARR. Growing companies usually have growth rates that are related to their size, industry, and country. Companies can use growth rates as a guide to forecasting revenue, regardless of the size, industry, or country.
Tip 4: Have a clear and documented screening process
There will be a lot of potential deals thrown your way if you are successful. The problem is you are going to receive an overwhelming number of pitch decks from everyone trying to sell something to you. There is a risk of drowning in pitches without a clear and documented screening process. It is best to have an initial filter when deciding whether to move forward with a new opportunity.
- How can I make a positive impact on this company?
- Are the focus areas I intend to invest in aligning with this investment?
- Are there any clear rights to victory?
- Is the founding team a team I believe in?
- Is this a winner in my book?
My politeness dictates that I won’t move forward unless I am presented with an investment proposal that contains a strong technology angle, plus a business that has the potential to impact the world. You should conduct extensive research due diligence and interview the founders of those investments that have passed the initial filter.
Tip 5: Your offering.
Anyone with extra cash can invest as an angel, but if you don’t add value to the company you invest in, you’ll be labeled as “stupid money.” Some people choose to be passive angel investors, but for the ecosystem to function properly, you should help your founders. Starting to assist founders before investing is a fantastic way to establish a positive reputation. Simultaneously, make sure you’re providing the right amount of assistance without being overbearing or disruptive.
Tip 6: Pay attention to the team.
Examining other investors in the firm and determining whether the organization has a very well team are two ways to learn more about it. Even a sure thing can fail if the team isn’t dedicated to bringing it off of the ground.
Examine the founder’s and team’s backgrounds and industry skills, and see if they’ve previously launched similar firms or products. If the organization has a good staff, it will be able to respond to market changes if they occur.
It might also be advantageous for investors to have prior experience in the startup’s field. That way, you can make educated guesses about a startup’s future potential.
Tip 7: Invest alongside other angel investors
In addition to the fun and benefits of building your investment network, it can be a lot easier to invest with other like-minded investors. Co-investing and learning alongside people who have experience in your field is possible when you join an angel syndicate or find an angel group. Having access to active angel investors who I could ask questions to broaden my understanding of their investment philosophy.
A different viewpoint is also helpful when evaluating startups. You can utilize these as a way to challenge your thinking or help to shape it. The last advantage of co-investing with other angels is that you are not liable for the entire investment. That means you don’t have to pay them all outright. If you start as an angel investor with limited capital, this is especially helpful.
Tip 8: Do your (technology) diligence.
When evaluating the technology, be ruthless. Validating your key assumptions about what technology is supposed to do does not require looking at the codebase. Consult the app store reviews, take a look at live demos, and speak to the CTO (not the CEO). Find out what the company’s engineering culture is like and how the technology is performing. You can contact other investors who have done the diligence themselves if you are not sure how to do it.
Tip 9: Back the founder, not the business
Early-stage companies might be able to distinguish between success and failure based on their founder and founding team. Thus, you invest just as much in the founder as in the company. Among the many steps in the investment screening process, you’ll want to assess the founding team. Here are the things to look for:
A. A strong personality
Look for founders who are truly passionate about their company and have a strong desire to succeed. Leaders that possess this quality are capable of making difficult decisions and persevering in the face of adversity.
B. Commercially conscious
The greatest entrepreneurs are laser-focused on pushing the business’s key metrics and have a well-defined go-to-market strategy.
C. Relevant work experience or a proven track record
Founders with deep expertise in their business sector or industry are more likely to succeed. So, before making a decision, consider their previous projects and how effective they were.
Tip 10: Be aware of vested interests
Credible go-to-market strategies are integral to having a credible business, but they deserve a separate discussion. A vested interest can destroy a business by either failing to identify it (especially when founders do not possess domain expertise) or underestimating it. Marketplaces are one of the classic examples, but this can occur in many business models. A model aimed at eliminating middlemen or driving efficiency will encounter significant resistance if all of the players in the market have existing and entrenched relationships. Usually, these forces are very powerful, but this is not always the case.
Typical Sources of Angel Investors
Individuals with an income of around $500,000 and who are willing to invest around $500,000 for equity are included in this category. Using local chambers of commerce is a good way to conduct this process verbally.
Family and Friends
To obtain instant capital, family and friends are popular sources of funding. There is the possibility that new businesses could fail, resulting in a financial loss for investors. It is imperative to be transparent about the risks associated with the business.
The investment level of angels is higher as they operate as part of a syndicate, which aggregates angel investors. Syndicate team professionals choose the investment option.
The process involves collecting funds from a large number of people, each investing $1,000. Online investing groups are often called crowdfunders. The decision to accept an angel investment should be carefully considered by entrepreneurs. Apart from money, the company brings contacts, expertise in business, management skills, and other benefits.
Additionally, your business must have a comprehensive business plan since this will be necessary for securing financing from financial institutions. You can also use an angel to get more traction in your business. Angels can serve as sounding boards for your ideas and help to increase your market. You can make a world of difference to your business by finding the right angel investor at the right time.
Article Proofread & Published by Gauri Malhotra.