Angel investors are a significant part of the startup ecosystem. If you are an aspiring entrepreneur or founder of a young startup you may be thinking about fundraising with angel investors. Here’s what you need to know…
Angels are a key element and building block in starting fundraising. They can be one of the most critical sources of funding for startups. Before you rush out there with your new pitch deck to try and present to them, make sure you understand how they fit, what drives them, and what’s next.
What Are Angel Investors?
Angels are investors who invest in startup companies as capital partners. The term refers to individuals who participate in funding new companies and business ideas. However, we have also seen a substantial rise in the number of angel groups. These are groups of angel investors who all invest together for efficiency, impact and lower risk.
If your startup needs any funding at all, then angels are going to be an essential part of this. Make sure you’ve got a handle on them before you try putting a business plan in front of them. Below is a video where I explain in detail how angel investors and angel groups work.
Angel Investors: Where They Fit In
If this is your first time raising money for a startup, then it is important to know that you don’t just land all of the money you need in one lump sum.
Even the tens and hundreds of millions you hear about others raising in the news and on tech blogs are just temporary financing to get through the next few months ahead. So, this is a critical step for your success. Everything may be riding on it. Yet, to put it in perspective, it won’t be your last round.
Angel investors are early-stage investors. They will be among your first investors. They may be participating in your friends and family round. They might be your friends and family. Or they’ll come in just after that to provide a bridge to your next early rounds. This is partially due to their appetite for investments, level of sophistication and desire for returns, what drives them and their check sizes.
Angels may participate from the seed stage to Series B of your business funding rounds, though they may already be effectively priced out by your Series A due to the amount of money you are raising at that time.
Who Are Angel Investors
In many cases, you might feel like they are actually angels. Especially with the passion you have for your project at this point, and after spending months shopping for funding.
These individuals may include:
1) Personal contacts, friends, family and their friends
The easiest people to raise money from (especially in the early days) are personal contacts you already have. Friends, family, their friends, past coworkers and bosses, and college buddies. People you already know. People who know you. People you have a relationship with. You don’t just want their money. You want to bring them along for the ride and to enjoy and participate in your success.
They can also be the most forgiving and patient when things are going slow and not as planned. You also have the advantage of knowing how they are and how they react to certain situations.
2) Cofounders and silent business partners
Some founders have said they only want to bring in cofounders who are going to participate financially. They may even make their shortlist of candidates compete to get involved. Who is not only going to bring talent and be there for the ride, but also bring in the most capital to make it happen? Or maybe it is just minority owners who invest their capital and remain silent partners. Just make sure you structure this well legally so not to jeopardize future fundraising efforts and the terms you can get.
3) Former entrepreneurs and founder of new startup accelerators
Several notable entrepreneurs have gone from operations to launching startup accelerators. Here they offer seed funding, introductions to later investors, learning, and a focused environment alongside your peers that will force you to make progress quickly. These are not always easy to get into by any means. They may take equity. Yet, few if any seem to have regretted the experience. Just keep in mind you will probably have to move to their location for a few months during the program.
4) Entrepreneurs with recent successful exits
Other entrepreneurs have just sold their ventures for hundreds of millions and even billions of dollars. They have a lot of stock and cash coming available to them. Few of those I’ve interviewed on the Dealmakers Podcast have cared much for splurging on fancy cars and boats. They’d rather head off to a cabin for some quite for a while, spend time with family, and take their time to think about new projects.
Many don’t go at it again for another year. They know they need to diversify their money. They are also very comfortable with this space. They bring a lot of experience and connections that can help others go fast and succeed too.
5) Previous bosses and investment partners from venture funds
Your current or old boss may be one of your ideal first investors. If they aren’t already prompting you to go do your own thing, tell them about your ideas. They may want to invest in you and encourage you to take the leap.
6) Celebrity entrepreneurs like Mark Cuban
It may be a long shot, but there are great stories of others who have landed sizable investments from angels like these. It could be from getting on one of those TV shows. Or it could be a cold email or Tweet.
7) Regular individuals with significant amounts of capital to invest
Most often, when entrepreneurs are seeking angel funding they are looking to accredited investors. These are high-income earners and those with a high personal net worth. It’s worth pointing out that there is a lot of competition for their attention and money. Billions are being spent on marketing to them to capture their capital every year.
You may also raise from individuals who are not accredited investors if you are raising through crowdfunding portals and certain SEC regulatory filings.
While this fundraising strategy can add extra steps, cost and time, it opens up your round to a far, far larger percentage of the world’s population. You can tap those who are most passionate about your mission and product. You can use it to create early users and sales and brand ambassadors. It increases credibility and visibility.
Why Do They Do It?
Understanding your prospective investors is just as important as deeply understanding your customers. Probably even more so. As if you don’t connect perfectly with your angels, you may never make it to the stage of gaining customers.
Angels can be driven to invest in this way for a variety of reasons, including:
- It’s trendy
- They want to look smart and get bragging rights
- It can offer very high returns
- It’s fun and exciting
- They really want to help you
- They believe in the mission and want to help in any way they can
- This is a staple part of their investment portfolio
- They are trying to give back after having a successful raise for and exited a startup themselves
What Do They Want?
Put simply, they want to look and feel smart, feel like they are making a difference, have the opportunity to generate great investment returns and be able to rationalize why they aren’t going to lose this money they invest with you.
Some angels are very business savvy and experienced in the startup world. Others aren’t and are just dipping their toes in now.
Being very early days for your startup the number one deciding factor on whether to invest or not is you. Do they like you, want to help you, are inspired by you, and believe you can do this and will stick it out?
The business idea is secondary to this. Yet, it also has to make sense. Are you demonstrating that you’ve really thought it through, know how it could fail, know your competition and have differentiation and a competitive advantage?
Is this a really big market that has the potential to 10x or 100x their investment?
Are you coachable and willing to learn and hire the best team and M&A advisors to see this thing through?
What’s Next, After Your Angel Round?
Almost as soon as you are closing your angel investment round, you need to be back out there preparing and raising for your next round.
You also have to keep the business growing and show great use of these funds, and that you are gaining customers and results. Though at least half of your time is probably going to be spent on raising the next round. You need a new pitch deck and pitch, you need to be asking for introductions, be networking and setting the stage for the ask. You might find this a critical time to hire a fundraising coach to get you to this next level.
Remember that storytelling plays a key role in fundraising. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
ACCESS THE PITCH DECK TEMPLATE
What If Your Angel Round Fails?
You never fail unless you quit. Though it can absolutely take a lot longer to raise a fundraising round than you think it will. It may be longer than you think you can survive without new money. So, what do you do?
Maybe the market is in a tough moment. Maybe you are ahead of your time. Maybe your pitch deck and presentation just isn’t cutting it. Or investors may be focused on a totally different model.
If you haven’t had at least 301 investor rejections yet, then you may simply have not been out there asking enough.
In some cases, you may need to buckle down for a while and just bootstrap it. That has advantages too. It may take longer to grow. Yet, you’ll be hyper-focused on getting the most out of every penny and getting everything right the first time. Once you have proven your concept, achieved product-market fit and are profitable, you’ll have plenty of investors lining up to give you money and bigger companies wanting to buy you out.
If you can’t run that lean, then you can borrow. If you have some track record of revenues then you should find business credit cards, business lines of credit, equipment financing, merchant advances and other loans available to you.
You may also be able to ‘founderize’ some key team members. Offer those who can afford to miss a couple of paychecks stock options and equity for sticking it out and helping you get through until the funding comes in.
Who knows, if you do these other things right you may be able to leap right to an acquisition or VC and strategic funds, instead of holding out for angels.
Notable Angel Investors Who Might Fund Your Next Startup Venture
- Keith Rabois
- Will Herman
- Scott Belsky
- Rick Marini
- Charlie Songhurst
- Brad Harrison
- Gary Vaynerchuk
- Clark Landry
- Wayne Chang
- Dharmesh Shah
- Mitchell Kapor
- Ullas Naik
- Raymond Tonsing
- Kevin Mahaffey
- Elad Gil
- David Sacks
- Matt Mullenweg
- Fabrice Grinda
- Paul Buchheit
- Wei Guo
- Alexis Ohanian
- Scott Banister
- Naval Ravikant
- Daniel Curran
- Marc Benioff
- Mark Cuban
- Simon Murdoch
- Ron Conway
- Esther Dyson
- Kevin Moore
- David Tisch
- Dave McClure
- Semil Shah
- Max Levchin
- Jason Calacanis
- Benjamin Ling
- Brendan Wallace
- Tim Draper
- James Sowers
- Auren Hoffman
- Lee Linden
- Joanne Wilson
- Farzad Nazem
- Joshua Schachter
- Garry Tan
- Rajan Anandan
- Xavier Niel
- Dave Morin
- Jose Marin
- Reid Hoffman