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It is very common for small businesses to need an infusion of capital at some stage of development. Most of us don’t have wealthy family members and friends, so how do you find someone interested enough in your business to financially support it?
While angels are not naturally hanging out in the outfield or in a cornfield in Iowa, it means you will need to put in face time with local business organizations, the social community, and your computer to find them. Daina Trout, founder of Health-Ade Kombucha, shares some insights on the investor process in this podcast.
Local is key. Angel investors like to remain local with their cash and time. Wait, time too? Yes, top angels, who were previous business moguls themselves, will mentor and coach the businesses in their portfolio.
Angels rarely fly solo. They often join organizations like Rockies Venture Club and Pipeline Angels. Both of these angel networks are specific to their communities. Research which angel groups are in your area with on-line tools like Angel Capital Association, who currently boast over 400 angel groups in their database.
Local angel organizations come in many forms, but all have similar characteristics:
Once you’ve found your local group of angels, it is time to wow them with your pitch.
Angels often take a personal interest in a project and the person behind it…you! Some angels are likely to be less discriminating than professional investors and lenders because it is their own money. No two angel investors are the same in what criteria they look for but in general, you need to prove return on investment. Usually, angel investors want to see and understand the following before committing cash:
Angel investing is risky and proving a strong return on their investment is going to be one of the most attractive aspects of your business for an angel. Once you have made connections with your local angel group, get ready to pitch and explain more about your business.
From a well-crafted pro forma, an investor or owner should be able to perform what-if scenario analysis, calculate financial ratios, potential profit after taxes, determine future financial health and most importantly, return on investment.
Before starting, you will want to assess your skills in financial modeling. If you are not feeling confident, seek out professional CFO services to create a pro forma so you can focus on growing.
If you are going to model on your own, focus on the goals of your operation and ask yourself where it will be in 5 years. You can watch this free webinar to walk you through what investors look for in a pro forma and mistakes to avoid.
You’ve wowed them with a pitch, shown them the potential for return on their investment, and you’ve modeled the next 5 years with a pro forma. They want to give you cash in exchange for one simple thing: equity.
Generally, a syndicate of first round angel investors will ask anywhere in the range of 10 to 35 percent of the equity, with the average being right at 25%. Again, this is general, and it will be negotiated based on the investment amount, based on the valuation of your business, and on how much you are willing to sell.
Angel investing is a high risk/high reward style of investing. Angel investors know full well that they could lose their entire investment. They want to mitigate this risk by having a large stake in the business. There is no hard and fast rule for how much you should sell. The answer really lies on how much of the company’s equity you, as a founder, are willing to part with. Keep in mind, whenever you take money from an investor, you are also giving up a portion of control. Selecting the right angel that understands your vision is vital for the relationship to be successful long term.
Finding an angel investor who is willing to invest is not an easy task, but the effort will really pay off when you find the angel investor who is willing to devote time and money in your business. Angels are not investing in entrepreneurs for charity and you are probably not starting a company for laughs. There is hard work involved on both sides with the shared intent to succeed.
1 Financing High-Growth Firms: The Role of Angel Investors, Organization for Economic Co-Operation and Development (January 2012), https://www.oecd.org/sti/ind/49310423.pdf
2 Laura Huang, et al., The American Angel, Wharton Entrepreneurship and Angel Capital Association (November 2017), http://docs.wixstatic.com/ugd/ecd9be_5855a9b21a8c4fc1abc89a3293abff96.pdf
View the original article here.
Chelsie Kugler
Chelsie is the Vice President of Business Development at CFOshare. She helps small business owners improve their accounting and financial planning by surveying their company’s needs and aligning solutions internally or through CFOshare’s outsourced team.
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