Approaching angel investors for seed funding is a critical stage in a company’s development. It comes at a point where you’ve probably read the tips to creating a successful business and are well on your way to ticking off most of the things you’re going to need. However, it is unlikely that you have enough funds to be able to start a company solely off your personal savings or even the combined savings of you and any business partners. Here you will learn about the telltale signs that it is time to approach angel investors.
What are the signs that it is time to approach angel investors? There are 7 signs that it is time to approach angel investors:
- You Have Already Secured Seed Funding from Friends & Family and You Need More
- You have data on market trends
- You can show market validation
- You have a clear marketing strategy
- You have a reliable team
- You have created a business culture.
- You have a pitch
This article will dive into the full details on how to set your company up for angel investors. The pre-seed funding stage is a crucial stage in an emerging company’s development. It will briefly address how business structure affects your ability to secure funding from angel investors.
What Is an Angel Investor?
For those who are unfamiliar with what an angel investor is, they can provide that much-needed spark for start-up businesses. Angel investors are typically wealthy, established individuals. They provide money as capital to companies that they feel have demonstrated the potential for future growth. Typically they are looking for high returns, greater than 30 times their investment.
Angel investors are looking for companies that are in the early stages of development. This sets angel investors apart from venture capitalists, who typically exist as firms looking for established start-ups operating within select sectors.
Since they are often acting on their own behalf, an angel investor will perform due diligence differently than a venture capitalist. There is less history for angel investors to review so a lot of what they consider is ensuring the right conditions for future growth. The extent to which an angel investor involves themselves in the day-to-day operations of a company is simply a matter of personal preference.
An angel investor will offer a lump sum of cash to a start-up and ask for equity in the company. Angel investors must meet the Securities Exchange Commission (SEC) definition of an accredited investor. This designation consists of individuals who have a net worth of at least $1 million and/or make at least $200,000 a year.
They will typically invest up to $1,000,000 either as individuals or in groups and for that get 25 to 30% of the company.
How Often Do Startups Go to Angel Investors?
Business startups approach angel investors more frequently than venture capitalists, according to data from the Center For Venture Research. Angels provide approximately 90% of outside equity for startups. If you are just starting out a business, it will be much more practical to approach angel investors than venture capitalists.
Signs That It Is Time to Go to Angel Investors
There are 8 telltale signs that it is time for your company to approach angel investors. These are mostly steps that you must take to establish your company before approaching angel investors. They will almost certainly ask you questions related to your business approach. Do not be caught off-guard by neglecting to complete these essential steps for business establishment in the pre-seed funding stage of business development.
1. You Have Already Secured Seed Funding from Friends & Family and You Need More
If you want to gain the trust of angel investors who are not family or close friends, it helps to show that others have shown interest in your company. Asking those close to you for help is often difficult, but you might need to be able to prove that there are others who believe in your company.
Here is how seed money plays a role in your pitch to potential angel investors:
- Seed funding is defined as the private investment of capital in a company in exchange for equity, or ownership stakes
- Seed money typically falls within a $1000- $100,000 range depending upon the size of the company
- In many situations, angel investors themselves will be a source of seed money
- Angel investors will want to know what level of interest already exists amongst others you have approached
I want to further clarify here the terms angel investor and seed investor are synonymous.
The angel investors are your seed funders, but you may need to prove these individuals that there is other interest in your company. You may have to approach angel investors that are outside your close social circle. These individuals will probably be more critical about your operations. You will also need to be transparent about the quantity of personal savings that you (and any partners) have invested in the company.
2. You Have Reliable Data on Projected Market Growth
One of the central elements of your pitch to angel investors will be reliable data showing projected market growth. This goes beyond being able to prove that there is market demand for your product or service. The potential investor needs to be convinced that any interest is not part of a fad that might die out quickly.
According to Carnegie Mellon University, a good pitch will be able to answer the following questions, at the very least:
- What is the total market size?
- What is the addressable market size?
- What is the projected market growth?
Angel investors are going to want to know the answers to these questions. You will have a hard time gaining investors if you cannot show that there is market demand for the products or services that you have to offer.
3. You Can Stand Up to Due Diligence
Investing in accounting software is the best way of ensuring that you are able to keep tabs on your company finances. There are few things that will turn potential investors away quicker than a disorganized balance book.
A clean balance book shows that you have your affairs in order. You should be able to show that you are tracking your company’s finances in an organized manner. Quickbooks Online is a standard piece of software that is easy to use and helps you create the reports you need. It also allows accountants to easily audit your reports.
This is because Quickbooks Online is cloud-based and has a user interface that is straightforward and intuitive. You can use Quickbooks accounting software to help you perform numerous business duties including:
- Tracking and paying your bills
- Tracking your product or equipment inventory
- Creating invoices for customers
- Building a contact list of clients
- Tracking payments from clients
- Running payroll among a plethora of other features
Once you have set yourself up with a balance sheet for your company, you will be ready to go to angel investors. Why not go with a cloud-based accounting program that allows you to track your company’s finances real-time. Once the investments start rolling in, you will need a reliable way to track funds.
A program like Quickbooks will also serve to impress potential investors, showing them that you are on the top of your accounting game. You can also familiarize with accounting terminology with resources such as the following:
You certainly don’t need a degree in business or finance to start your own business, but you should at least familiarize yourself with basic financial terminology before meeting with potential angel investors. Otherwise, you may be asked questions that you don’t understand.
4. You Have Developed A Marketing Strategy
One of the most critical elements of a pitch to an angel investor is the part where you reveal your marketing strategy, according to this resource from Carnegie Mellon University. Well-informed angel investors will often ask you about your cost of customer acquisition. You will calculate this number by totaling your market costs and then dividing that number by the number of customers that you have acquired throughout the duration of your marketing campaign.
You may have not spent much money on marketing yet, but you should still calculate this number if you have any active customers at all. If you have not spent very much money on advertising and still have customers, then the customer acquisition cost will probably be quite impressive. Even if you are not asked for this figure, any angel investors will still probably be interested in your proposed marketing scheme.
Every start-up needs some kind of a marketing plan. Don’t approach angel investors until you have a solid customer value journey. You should seek out marketing schemes that are affordable and yet effective. It might even be worth hiring a marketing specialist to help you start a marketing campaign. Some companies even specialize in marketing for a specific industry such as LeadJig who focuses on financial services, making them experts in this field. They will know exactly what campaigns are going to be successful for a finance company and why they might be a better choice than using a general marketing company. If you don’t want to hire someone to help, social media can also offer affordable marketing opportunities for start-up businesses.
Show Angel Investors Your Social Media Presence
You are encouraged to at least develop pages on social media apps prior to approaching angel investors. According to SmartBrief , social media profiles are a no-brainer for start-up businesses because they are free. By creating a social media page for your company, you will join a growing club of businesses that are creating social media pages for their company. But just having a social media presence is also useless. Be sure that you have
5. You Have Built A Good Team
Once you have built a reliable team for your company, then you will know that it is time to seek out angel investors. If nothing else, you will need seed money to help you pay your employees. Also, having at least one good business partner increases your chances of being able to secure seed funding from an angel investor.
Sometimes there are no better options than flying solo, but it will be more of a challenge for you to attract business owners if you are the only one involved in your company’s operations. According to the College of Menominee Nation, angel investors will typically not invest in sole proprietorships.
6. You Have Committed to A Business Structure
Angel investors are also less likely to invest in general partnerships. A general partnership is a business in which the partnership exists as a separate legal entity from its partners. The partners themselves will have unlimited liability for the debts of the partnership. General partnerships are less strictly regulated by the government, which makes them an attractive option for start-ups. Unfortunately, they also struggle to secure funding from angel investors because of the lack of security.
Corporations, specifically C-type corporations, are the most likely to receive funding from angel investors. C Corporations have two levels of taxation: at the corporate level and at the shareholder level. Shareholders are not held liable for paying taxes on the company’s profits. Angel investors are attracted to C corporations because of the way that this business structure is regulated. It offers the promise of more investment security.
Historically angel investors have not invested in Limited Liability Companies (LLCs), though this is reportedly starting to change. Whatever business structure you decide to roll with, you will need to be aware that it will affect your ability to secure funding from potential angel investors.
Beyond the business structure think about your business as an entity. Have a clear mission and vision, a plan for the future, and be clear about what you will create.
7.You Have Practiced Your Pitch
Do not make a pitch to angel investors until you have practiced that pitch, even if your audience consists of family members and friends. An expert affiliated with the Stanford University Graduate School Of Business notes that the key to developing a good pitch is the ability to be able to think like an investor.
Telling a story is an effective way to develop trust with potential investors. Above all, you should be able to convince your investor that you have a passion for the product or service that your company will provide. It shouldn’t be hard for you to share a story about why you are pursuing your dreams. It will also calm your nerves to start out with a brief story about your background rather than sharing your business plan and relevant data right from the get-go.
Your presentation should be clear and concise and 20 minutes at the longest. Your initial presentation will include your back story and an abridged version of your business plan. You will pull together supporting data, such as specified costs and revenue, for questions that the angel investor(s) may have for you. You will learn exactly what kind of supplemental data you need to get ready for your pitch later on this article.