You have an excellent business idea. From your evaluation and projections, this could be the thing that takes you to the next level. But there’s one problem. You don’t have the capital to get the business up and running. Welcome to entrepreneurship. One of the reasons most startups fail before they start is due to lack of funds.
Fortunately, like with most challenging tasks, adequate preparation helps you get your foot in the door. If you’re not sure how to find and approach angel investors, this guide is for you. We’ve included tips on how to identify angel investors and how to approach them to get seed funding. Let’s jump right in.
Steps on How to Approach Investors for Seed Funding
Knowing where and how to find angel investors is one thing. Approaching them is a whole different story. You may have the best business idea on the planet, but if your approach is wrong you will lose many opportunities to convince investors to fund your starting capital.
For this reason, it’s crucial to be adequately prepared. Don’t just walk to a potential investor and start rumbling about how amazing your business idea is. Brainstorm, figure out what makes you different and put yourself in the investor’s shoes. If you were the investor, what would you want to hear? Would you part with your hard-earned money for the business idea?
These are some of the things you need to think about before pitching your idea. The following steps will also come in handy and help you land that big fish you’ve been eyeing. So, without further ado, let’s get this show on the road.
Step 1: Decide Whether You Need an Active or Passive Investor
Before you approach any potential investor to fund your business, you need to decide what kind of investor you need. Do you need a passive or active investor? What’s the difference and how does each contribute to your business?
An active angel investor is the type of investor that takes up an active role in the business.
Usually, this type of investor will want to know the basics of the day-to-day running or your business and may even join the board and be involved in decision making.
However, you need to be careful about active investors because there’s a thin line between playing an active role and micromanaging. You need a supportive investor who contributes without interfering.
A passive angel investor, on the other hand, isn’t as involved. They’ll want to be updated about business progress quarterly, bi-annually, or annually but are always hands-off. However, while the passive investor seems like the dream come true for a startup, it can be a problem.
If the investor is hard to reach and doesn’t participate in any way, it may be challenging to get things moving especially in situations that need his or her signature or approval. Therefore, think about it and figure out which arrangement works best for the kind of business you want to start.
Step 2: Do Your Homework
According to Small Business, you’re in a better position to find a suitable angel investor if you know what to look for. Think about it. If you’re at an event packed with successful business investors, what approach will you use to figure out whom to approach? Exactly – without this information, you’re bound to have many meaningless conversations.
Find out the following before approaching any investor:
- How much are they worth?
- How old is he/she? You need someone over 40 years old
- Which other businesses have they invested in? Are they successful?
- Can he/she refer you to other investors if he/she is not interested?
- Are they willing to invest for longer than 7 years?
- On average, how much does he/she make monthly?
- What industry does the investor specialize in?
Such information will give you an idea of the quality of investor you’re getting. What’s more, you’re in a better position to narrow down to the one that suits your needs the most.
Step 3: Build a Strong Team
An investor will also want to see proof that other people support your idea. Not to mention, they’ll need to see that you’ve invested time and skill into your business idea. You can do this by building a strong team. The type of team will depend on the type of product or service you’re planning to offer.
For instance, if you plan to offer a financial service, you’ll need to have a financial advisor, accountant, and other experts in the field to iron out any kinks in your idea. Approaching an investor with such preparation shows a lot of promise.
Step 4: Have an Excellent Product
The investor won’t care too much about what you’re saying if your product isn’t speaking to them. Angel investors are constantly looking for the next big thing that will make their pockets even heavier. Therefore, replicating what’s already on the market won’t cut it.
You need to go above and beyond to offer a unique product that will have every investor wanting to jump in. Apart from creating a unique and appealing product, you also need to ensure you’ve tested the product or service and you’re certain what you’re selling works.
Step 5: Know Your Numbers
Pitching to an angel investor without an understanding of your numbers is digging nails into your own coffin. Investors want to know how much your business is worth and what’s in it for them. Therefore, before approaching any potential investor, you need to do a valuation of your business and possible projections in the next years.
This way, you’ll know how much to ask for what percentage of your business. You’ll also know how much room for negotiation you have in terms of percentage to give your investors. With such a plan, you’re less likely to walk away with a raw deal.
Don’t expect the investor to be your friend and offer a fair deal. If you don’t know the value of your business, they’ll take up to 50% ownership for very few funds – a decision you may end up regretting. So hire an expert if you don’t know anything about valuations before setting that meeting.
Source: Startup Grind
Step 6: Have a Solid Business Plan
There’s a high chance all your potential investors will want to see a business plan during your meeting. And in most cases, angel investors are not particularly impressed with startup business plans. Don’t think you did something wrong. They’re only reasoning from the vast experience they have.
However, there’s one thing you need to ensure stands out. Your business plan ought to paint a picture of a strong team that’s ready to face market changes and any other challenges that come. Such information gives the investor confidence that they’re betting on the right person. Therefore, do your best to make your business plan stand out.
Step 7: Decide Whether Your Personalities Match
A relationship with an angel investor is quite intimate, especially if they’re active investors. You’ll have to work with the person for a long period of time. Therefore, it goes without saying that you should choose someone you get along with.
Do your personalities match? Do they seem like they would be easy to approach? Are they shutting you down even before the business has started? What do other entrepreneurs they’ve worked with say about them? The answers to these questions will give you an idea of whether or not to sign the deal.
Prepare for Your Pitch
Lastly, come up with a catchy pitch and anticipate some of the questions the investors may ask during your meeting. It may help to have someone who has been through the same process listen and quiz you in preparation.
Some of the questions you can expect include details about your business valuation, previous sales, whether or not you have other investors or partners, what percentage of your business you’re selling and so much more.
Other Important Considerations
Apart from knowing what to say and what to do before approaching an angel investor, it’s also crucial to differentiate this type of investor from other types of investors. What’s more, you should have an idea where to find them and the type of angel investor you need for your business. Here’s what you should know.
Who Is an Angel Investor?
An angel investor is a successful person in their own right. It can be an individual or a group of people. Angel investors have one thing in common – they have a high net worth. Most of these investors have been where you are. They achieved their success through entrepreneurship and other ventures.
But this isn’t always the case. In some cases, you’ll find angel investors with different backgrounds but with a high net worth. Another thing they have in common is that they look for promising business ventures to invest in for a high return on investment (ROI).
However, you don’t just get money from an angel investor. These individuals tend to have a lot of experience in entrepreneurship. Not to mention, they have a strong network of professionals. Therefore, when you land an angel investor, you instantly improve your likelihood of success.
Getting an angel investor to invest in your business is, however, easier said than done. These investors reject about 75% of the business proposals they receive. For this reason, you need to stand out to get an audience with them.
Source: Lighter Capital
Seed Funding and How it Works
As an entrepreneur, it’s crucial to understand what stage your business is in and what kind of funding you need. So what is seed funding and what should you expect? Seed funding happens during the early stages of a business.
The angel investor will invest a certain amount of money to your business in exchange for an equity stake in your business. The purpose of these funds is to get your business off the ground. It’s the best solution for most startups because they lack the assets and capital needed to access loans.
After the investment, when the business profits, the investor will benefit based on their stake in the business. They may also choose to sell if they wish to do so. However, the capacity of the investor’s involvement will depend on your business relationship.
Source: Intrepid Private Capital Group
Types of Angel Investors
Before you come up with a strategy on how to approach angel investors, you need to understand the different types of angel investors there are. This way, you’ll know where to look and understand how they’ll contribute to making your business better.
There are two types of angel investors; groups and individuals. Both these investors bring different things to the table as you’ll see.
Angel groups also commonly known as angel syndicates or angel networks are a group of individuals who come together for the purpose of investing. Individually, each member of the group has a less investing potential compared to the typical individual investor.
However, when they bring their funds together, they’re able to raise more money for promising startups. And because they invest together, they share all investment responsibilities such as managing portfolios, conducting due diligence, and deciding on which ventures to invest in.
So what can you expect from angel syndicates? Normally, approaching angel groups can be tedious. There’s a lot of due diligence, multiple meetings, and you may have to pitch to different sub groups depending on how big the network is and how they run things.
However, landing an angel group can be an opportunity of a life time. Because there are many individuals contributing funds, you’re in a better position to get a significant seed funding. Not to mention, they have networks with other high profile institutions, which will prove invaluable for your business.
You also have the option of getting seed funding from individuals. Normally, these are individuals who’ve earned success through entrepreneurship in different sectors. Therefore, they have an excellent mastery of their field and could be an invaluable asset if you’re in the same industry.
Another benefit of individual angel investors is that they tend to decide faster. If they love your business idea, they’ll jump in without wasting time or having you jump through hoops to get the funding.
However, you shouldn’t expect them to invest a lot of money. Because they’re acting alone, their contribution tends to be lower compared to angel groups. Furthermore, there’s no guarantee that their network of friends and colleagues will contribute money to your business.
Where to Find Angel Investors
So, now that you know the different types of investors and how they benefit your business, how do you find them? Finding angel investors willing to invest in your business can be a lot like pulling teeth. You’ll meet many people who love the idea but not enough to invest.
You may also find investors who don’t match what you’re looking for in terms of skills and personality. However, if you know where to look, you’ll find a suitable investor to pitch to within no time. Here are some of the best places to fish for investors for seed funding.
Chances are you won’t meet your dream investor while you’re just going about your day. You need to plant yourself in situations where you’re more likely to meet possible investors. In most cases, entrepreneurs find investors through referrals.
Therefore, you need to start meeting as many relevant people as possible who can point you in the right direction. An excellent place to start is attending business and trade organization events. In such settings, you’ll be surrounded by multiple business owners.
And who knows, the investor you’re looking for may be among the people you chat with. So if you haven’t started already, get out there and network like your life depends on it!
If you’re socially awkward and looking for a way to identify multiple angel investors all at once, online research is a great place to start. The best thing about online platforms is that you can get as much information as you need and narrow down your search to investors specializing in your field.
However, approaching investors online can be quite challenging. Most investors don’t respond to unsolicited requests and you may get the cold shoulder often when they do. Nonetheless, it’s possible to find a promising investor through the following channels.
- LinkedIn: Identify companies in your area of expertise and find out who is listed as an investor or board member.
- Press releases: Check to find out who took part in raising funds for different projects for the company.
- Use online directories: Find angel investors listed in directories in your local area of country.
- Angel groups: Approach angel groups listed online and relevant to your business.
Sometimes, the angel investor you’re looking for is close to home. It could be a friend or relative. Take some time to think about wealthy friends or family members who are always investing in small businesses.
Alternatively, if you know someone who started a business successfully using investor capital, ask them for recommendations. Find out what steps they took to get the investor and ask if they could give you an introduction.
However, don’t just go for any investor that’s willing. Ensure they are in the same industry as you are. As we mentioned, an investor brings more than money to the table. You need someone who will improve your skills and open doors to a great network that will benefit your business.
Source: Small Business
There you have it; a detailed guide on how to find and approach angel investors for seed funding. To recap, decide what kind of investor you need (active or passive), determine the best places to find potential investors, and use the above steps to come up with a strategy. With this approach, you should be well on your way to finding your dream investor and starting your business.