The importance of being ANGEL(ed)

Let’s start from the definition: an angel investor is someone who invests in a new or small business venture, providing capital for start-up or expansion. Angel investors are typically individuals who have a good tolerance for risk, cash available and are looking for a higher rate of return than traditional investments and for companies aligned with tier values or interests. An angel investor return objective is usually in excess of 25 percent.

Angel investment, its most seen occurrence, takes the form of equity financing, whereby the investor’s money is exchanged for an equity position in the company. The valuation used to determine the equity share is a most important subject worthy of its own space.

Angel investors fill in the gap between the small-scale financing provided by family and friends and venture capitalists. Angel Investors can be found everywhere, however they do not advertise and flaunt, which makes it a bit tricky to locate the investor that is interested in your sector and that whose personality is right for you.

Pros and Cons

Getting funded with angel money is a bit like entering into a marriage. Like any partnerships, it has clear advantages and a few disadvantages.

The big advantage is that funding from an angel investor is much more stable than debt. Angel Investors do not expect the investment to be paid back in the event of business failure. Even more importantly, most angel investors understand business and take a long-term approach and view. Furthermore, every time an angel investor decides to cut the proverbial check, they are surely investing but also looking to have a positive impact on the venture they are financing. Most angels invest in sectors that they know or that they feel a kinship with. With the funding, they also bring to the table their competence, connections and experience.

One disadvantage may be that most angel investors will want to have a say in the strategic direction of the company and in the steps that the management team intends to take to reach their goals. This may feel like a constraint only if the fit with the investor was not right from the beginning, or if the communications from the entrepreneur is not transparent.

Moreover, it is important to know and to consider what an angel investor usually looks for and whether your venture is in the position to fill those needs.

Criteria of Investibility:

Return – every investor looks for a solid return, they know that the risk is high, hence it’s worth taking only if the potential return is higher than what can be achieved with traditional investment channels.
Reason – every person has different reasons to invest. However, they can be divided in 3 categories: economic, hedonistic and altruistic. The hedonistic type gets excited in being part of the creation of something new, while the altruistic looks for an investment opportunity aligned with her/his values and that has a positive impact. Ensure that you know who you are taking to and pitch accordingly!
Team – any early stage investor attributes as much or more value to the management team as to the product or service. The management team has to be dedicated, competent, trustworthy and knowledgeable. The right mindset will be looked for.
Business Plan – Even at an early stage, an investor will want to see a well devised business plan, it is a way of showing your vision. A business plan is both the roadmap to the vision and the binoculars to see the final outcome.
Investment readiness – while there are different modes of investment, you must ensure that you have thought about your ask and your give, that you have a basic investment memorandum ready before you speak with an investor.
Involvement – as I mentioned before, most angel investors are looking for an opportunity to contribute their skills and connections. Be prepared to offer something that allows for this to happen.
Exit – Even if they take a long term view, investors will want to see certain timeframes and an exit strategy.

In conclusion, like any relationship, establishing a relationship with an angel investor requires work and involvement in order to be profitable and fulfilling.

In my book, Invisible to Investible, What your investors want, I go into more details about the topic.

By Angelica Morrone, Partner at Venture Tinkers