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What Every Entrepreneur Should Know About Angel Investors

Author

David Rodeck

More by David
Author

David Rodeck

More by David

If your business needs money and regular small business financing isn't getting the job done, an angel investor could be the answer. These are investors, usually high net-worth individuals, looking to buy into startups. Sound interesting? Here's what you need to know — as well as tips on how to pitch to an angel investor.

What Is an Angel Investor?

When you work with an angel investor, they give you money in exchange for part ownership in your business. The two of you negotiate how much money they will give in exchange for what percentage of your business. For example, you might give them 15 percent of your business in exchange for $250,000.

Benefits

Getting money from an angel investor can be simple: If an investor likes your business plan, they can write you a check. It's not like taking out a bank loan where there are usually numerous requirements (for example, collateral or a near-perfect credit score).

Also, you do not need to pay the angel investor right after they buy in. It's not a loan with monthly payments. Instead, the investor receives a share of your profits going forward. During the initial startup years, when money is often tight, this can be a big help.

Drawbacks

Taking on an angel investor means selling part of your business. You will no longer be the only owner, and the angel investor will have a say in your business decisions.

You can also end up paying much more to the angel investor over time. With a loan, you know exactly how much you'll pay back. The angel investor receives a share of your profits so long as they own part of your business, so there is potentially no limit to how much you could end up paying them.

Where to Find Angel Investors

Angel investors could be people in your personal network, like friends or family, who believe in what you're doing and want to buy in. You can connect with investors through your local Chamber of Commerce or Small Business Association. They hold events where business owners can meet angel investors.

The Angel Capital Association is a great resource. They list angel investor networks throughout the country as well as the best online platforms for finding investors.

How to Pitch to an Angel Investor

If your business is going to win funding, you need to learn how to pitch to an angel investor. Make sure you understand your market and your competitors. You should also have a firm grasp of your business plan and the results you've already achieved so you can communicate this information in discussions.

Investors will likely be most interested in your sales projections and when you expect to make a profit. They are usually worried about losing money, so if you can show that they will start earning money soon, they may be more interested in investing.

You should keep your presentation brief. Explain the problem you are solving and focus on the financial opportunity. Angel investors are usually not as concerned with the in-depth technical details of your business. Keep in mind that not everyone will love your idea, even if it's a fantastic one. Keep pitching and you may eventually find the right angel investor.

As a final tip, remember that an angel investor can be more than just a source of capital. If you find an experienced angel who has helped build companies before, they can also be a valuable partner for your business.