Businesses in the startup stage may turn to close relationships the founder has, such as family and friends, to bring a product or business idea from the drawing board to create a testable concept.
If all goes well, you’ll find yourself needing more funds, to build inventory, do tradeshows, public relations and other marketing – read more about how in our post ‘The 5 Stages of Growing a Food & Beverage Business‘.
This may require expanding your network beyond those you already know and finding Angel Investors.
Who are Angel Investors?
Angel investors are individuals with a high net worth, allowing them to provide startup businesses with funding. Angel investors may do this individually or in angel groups that pool funds.
These investors are also referred to as “seed” investors because they invest in the earlier stages of business’s life cycles. This source of funding is exchanged for part ownership of the business.
The right Angel investor doesn’t just provide funds, but ideally, they have experience in your chosen business area and can also provide mentoring, advice and business connections through their personal network as well.
Angel investors are only interested in businesses that have room for growth (scalable). Their interest is to invest a relatively small amount of funds, with the hope of increasing the value of the company, and their investment. As the business proves its worth, the Angel can then sell all or part of their investment to future investors.
What does the Entrepreneur Give Up?
To have access to an Angel investor’s funds, the entrepreneur sells a % of their company to the Angel. This is why it is critical to value the company correctly as well as pick an Angel with the right experience. A good Angel doesn’t want to own too much of a business, because the entrepreneur needs to retain enough of the business to remain motivated to grow it.
And as more funds are raised in the future, more of the company will need to be sold as well. Knowing what this financial ‘road map’ of the future looks like is essential.
Entrepreneurs need to understand enough of how this works so that they don’t make poor decisions early, such as undervaluing or selling too much of their company.
It is important to get advice from a business attorney experienced with early-stage funding to structure outside funding correctly.
The Role of Venture Capital
After Angel Investors, larger amounts of capital may be raised from sources such as Venture Capital firms (VC’s). The simple difference between Angel investors and Venture Capital firms is that Angels fund businesses from personal resources and typically invest relatively small amounts in companies that are in earlier developing stages of their lifecycle.
Venture Capital firms raise larger amounts of capital from professional investors and specialize in finding promising businesses to invest in, that already have some traction and have developed a working business model. Like Angels, VCs don’t only supply funds, they assist with key management decisions, and provide their business knowledge and networks to help the business and introduce it to potential customers, suppliers, and key hires.
Where to Find Angel Investors?
There are groups of angels and associations that provide information and access to Angel groups. A few associations are:
– Angel Capital Association (ACA)
– Angel Investment Network
The Angel Capital Association also provides information on over 200 angel group firms in their directory.
In reality, very few businesses are successful at attracting Angel or Venture Capital investors. These types of professional investors require a business to have a large scaling potential and a clear path to an exit (selling their ownership stake later).
Most small businesses start by the founder’s self-funding from their own resources, using credit cards or small business loans. As well leaning on friends and family.
But if your business is particularly promising – if you have real competitive advantages, intellectual property (IP), especially if it can be patented, you may be able to attract the outside investments you will need to grow. And if so, you may be ready to start pitching your business plan to professional outside funding sources. The right investors will be as thrilled to find you as you are to find them.