Demystifying Angel Investment in Early-Stage Startups: How to Approach Angels

Angel investment in early-stage startups is responsible for dynamic changes in the US business landscape. Angels are trending toward diversity in 2023 with a strong focus on entrepreneurs who have disproportionately low representation.

Statistics indicate that in the first quarter of 2023, angel investors provided seed investments worth $3.18 billion. Interestingly, female angels are entering the startup ecosystem in a big way, bringing valuable experience and skill sets to the table.

As of July 2023, there are more than 466 angel networks in the USA. And more than 250,000 active high-net-worth individuals support over 300,000 early-stage startups with funding.

Most of these entities are business leaders, industry bigwigs, and experienced founders who have built and exited successful companies. In addition to offering financial assistance, they also offer mentoring, guidance, and access to their networks that entrepreneurs can tap.

As a founder with an innovative business idea looking for seed funding, you should know how to approach angels. Read ahead for detailed information about how to acquire this valuable capital source for your new venture.

Understanding How Angel Investors Operate

Angel investors can be individuals or members of syndicates with multiple angles partnering together. They may also be venture capitalists, accelerators, and corporate investors helping new entrepreneurs to start and grow their businesses.

Other than professional angels, you can also raise funding from other people and personal contacts from your network. Think friends and family, former colleagues and bosses, co-founders, and people open to being silent partners.

Angel investors offer startup capital in exchange for equity in the new company but don’t have any voting rights. Further, they are open to funding startups over a longer period before they receive any real returns on their investment.

Most such entities are looking to fund industry-disruptive ideas and unusual concepts that other investors may not consider. Here’s what you need to know about how to approach angels.

Determine What Angel Investors Look For

As mentioned above, angel investment in early-stage startups is all about conviction in the business idea. When identifying viable investment opportunities, they have a set of criteria, such as:

Impressive Data and Metrics

Before reaching out to angel investors, make sure you’re ready with a robust business plan. Include detailed information about the startup costs, revenue, net income, Return on Investment (ROI), Customer Acquisition Costs (CAC), and more.

The plan should also depict market analysis, churn rate, runway, burn rate, conversion rates, and lifetime value of your customer. This data tells investors everything they need to know about the startup’s potential.

It also shows that you’ve done your homework and you have the business acumen they can invest in.

Product Prototype

While having a robust business plan is a great strategy, angel investors want to see the actual product. If you have a product prototype ready, demonstrating how it works and the value it provides can convince investors.

If the product is still in the development stage, you’ll present 3D virtual images and sketches. Be prepped to deliver a blueprint, tangible overview, or partial outline that reveals how the idea transforms into a saleable product.

Founders who have tested beta versions or samples on customers should provide feedback and reviews even if they aren’t favorable. Providing video testimonials is an effective strategy. Talk about how the current version falls short and the potential improvements in the pipeline.

That’s how you’ll demonstrate enthusiasm and flexibility in the business idea, an innovative approach, and the agility to adapt per customer specifications.

Competition and Market Research

This section of your pitch will talk about the target market, your market share, and the competition. Also, share information about the value your products provides customers and the USP that gives it an edge.

Investors want to see if there is a gap in the market that your products fill and if it has the potential for rapid scalability.

The Core Team

The core team and talent driving the company is one of the key angel investment determinants. Angel investors look for trained professionals that have the necessary skills and are passionate about their company’s mission and vision.

Your pitch will have links to their LinkedIn profiles and any other data that reveal their experience and track records with successful startups. Outline the roles they play in the company and the strengths they bring to the table. For instance, technical, financial, and customer acquisition and outreach.

If your startup builds software, having a team of competent coders as CEO and CTO on board indicates proficiency. Demonstrate that you have adequate skills to handle the various aspects of running the company. That’s a positive your investors are sure to appreciate.

Potential for Returns

Ultimately, investors are looking to make money off their investments. Your pitch should reflect the returns they can hope to get by way of high appreciation and growth rates.

Mentioning the possible risk factor is also an upside since it shows that the founder is aware of the pitfalls. And has backup plans in place to manage them.

How to Vet Angel Investors and Determine Their Suitability

Angel investment in early-stage startups can be highly beneficial in getting them off the ground. But before identifying the right entities to apply to, you may want to determine your venture’s needs.

Not all angel investors are alike, and you’ll determine the value you hope to get from the partnership. Make sure the entity is a great fit for the company before you initiate the application process. Expect that finding potential investors will take anywhere from three to six months.

Start by asking questions like:

Do They Have Experience with Investing in Startups?

First-time founders may want to partner with angels who are experienced in building startups. Do the necessary research into the ventures they have themselves started and exited. Or have invested and assisted in rapid growth.

Next, you’ll ensure they have industry and location-specific experience and an in-depth understanding of how your commercial landscape works. For instance, if you’re building a healthcare venture, look for angels who are familiar with the sector.

You can tap into their expertise and advice on how to navigate the challenges that come with the space. Their strategic outputs and marketplace knowledge are invaluable for accelerated growth.

Looking for more information on how angel investors and angel groups work? Check out this video I have created explaining in detail how they vet startups for scalability and long-term success. You’re sure to find it helpful.

Can They Offer Mentoring and Advice?

Although all angel investment in early-stage startups brings funding, it may not necessarily also offer mentoring. When vetting potential investors, check if they are open to offering non-financial support also.

Their mentoring, advice, and business approach can be useful when you’re ready for further funding rounds. Further, your association with the angel will lend credibility to your brand name, facilitating fundraising with other investors.

Are They Willing to Offer Long-Term Funding?

Angel investment is typically long-term, but it is advisable to check with the investors about their terms and conditions. Acquire funding from investors who are not likely to want to exit in the near future.

Look for high-net-worth angels that will write you checks with substantial amounts. Make sure they believe in your vision and are willing to support you in making it a reality.

Will They Provide Access to Their Networks?

Partnering with angels had an added advantage–you get access to their network of investors and industry experts. Make sure they’ll assist with other aspects of running the startup, like hiring new talent from their circles.

Also, check if the investors can put you in contact with a proven customer base, along with other professionals. These entities can be investment bankers, accountants, and advertising and marketing consultants.

Entrepreneurs with great business ideas don’t always have the expertise in every aspect of building the business. They need to retain additional skills to fill the gaps in their knowledge. And angels can help fill those gaps by recommending the right people to hire.

Can You Find References?

Before finalizing your list of angels, make sure they are accredited, and you can find references that will vouch for them. This factor holds true for both individuals and syndicates.

Ask around about the startups they have supported with investments before. You’ll also check for information about their vetting processes, approach strategies, investment terms, and success rates.

Get information about the typical funding amounts they offer, their terms and conditions, and the decision-making rights they expect. Ensuring that the investors and founders are on the same page and their objectives align prevents confusion in the future.

How to Acquire Angel Investment in Early-Stage Startups

Now that you have a fair overview of what angel investors expect and how to identify the right partners, let’s talk about how to approach them.

Step 1 – Develop a Compelling Pitch Deck

Put together a compelling pitch deck that highlights why investors should invest in the company. Use the tips outlined above about what investors expect from a viable investment. Make sure to include the business plan, metrics, data, and information about the core talent set working in the company.

Also, add slides on the competition, target market, financials, product and the value it offers, CAC, and investment returns. Your pitch deck should be concise and covered in around 16 slides.

Keep in mind that if you’re presenting the pitch virtually, investors are unlikely to spend more than three minutes reviewing it. If you’re presenting in person, expect to deliver in 15 minutes, leaving at least five minutes for the Q&A session.

Large font sizes, lots of white spaces, visual appeal, graphs and pie charts, and easy-to-understand language are critical for impact. As for the maximum word count, less is more. Restrict it to between 300 and 600 words.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the 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.

Step 2 – Build Relationships

Before reaching out to your angels, build familiarity and a relationship. If you’ve gone through an incubator or accelerator program, chances are you’ve got personal introductions to their investor networks.

You’ll attend all the conferences and industry seminars possible to interact with entities who might be interested in your company. Talk about the business idea and your role in converting the concept into a potential unicorn.

Building a relationship before reaching out for investment is always a more successful strategy. But, if you intend to send out cold emails, make sure to keep them short and concise. Deliver just enough information to attract attention so the recipient is interested in responding and asking for more details.

Avoid excessive descriptions and be direct in what you do and what you’re expecting from the angel. Attaching your pitch deck or data documents is never advisable. Instead, put down links to your virtual data room so investors receive only updated information as the company evolves and grows.

If you can provide virtual demonstrations of how the product performs, that’s great. If not, offer to hold a live demo at the investor’s convenience.

Step 3 – Expect Due Diligence from Investors

Before offering capital for a venture, investors conduct the due diligence process. And a valuation is part of it. Angel investment in early-stage startups is based on several other factors other than revenues and profits. That’s because most startups have yet to start generating revenues.

In that case, investors review financial projections and estimates based on market conditions, value share, and expected profits. For instance, if you receive an offer of $200,000 in exchange for an equity of 20%, understand that your venture is valued at $1,000,000.

Angels considering investing in the company are watchful of the potential risks, considering that 90% of startups eventually fail. In addition to evaluating the venture’s growth potential, they need to know the entrepreneur’s contingency plans to deal with potential risks.

Treat each call with angel investors as part of the learning process. Take notes and hone your skills on how to approach them and present your pitch.

Step 4 – Track and Follow Up with Prospective Investors

Angel investment in early-stage startups is similar to sales funnels. This means that you should have an efficient and systematic approach to the entire project. Maintain spreadsheets where you record discussions and notes about your interactions with each investor.

Sort prospects according to their industry relevance, experience, and worth, and prioritize accordingly. Maintain data like the investor, their location, funding amount, and expertise. Next, update the list each time you get on calls and their responses. Expect to hear a lot of nos before the final yes.

Treat each call like a learning experience in how to attract their interest and funding. Be prepared to invest a lot of time and patience before you finally land that first check.

Approaching angel investors to get funding needs careful preparation and a well-devised game plan. Take your time getting together the materials and crafting a compelling pitch deck that will get you the money you need.

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