As soon as entrepreneurs receive attention from an angel investor, they may jump at the chance to sign a deal. However, this impulse could cost individuals their whole company down the road. Typically, angel investors do not simply invest in a company—they also become advisors as the company begins to develop and expand. This guidance can prove essential to success, but when entrepreneurs and angel investors disagree on key issues, the conflict could cause the company to fail.
In many ways, angel investing has shifted from a boutique business to a mass-market product. The result of this shift is that some investors are not prepared to offer the involved guidance that entrepreneurs may expect from an angel investor. To some entrepreneurs, this hands-off approach may be preferable. However, individuals who are expecting mentorship may feel cheated. For this reason, it is imperative that entrepreneurs do their due diligence to ensure that a potential angel investor will make a good match.
Below are some important tips for finding the best angel investors for a given project.
Look at the angel investors behind similar startups.
Too often, entrepreneurs focus on finding angel investors in their local communities, rather than individuals who have knowledge of their specific industry. Entrepreneurs should start looking for angel investors by making a list of a few dozen successful companies that are similar to their current project. With this list, it becomes easy to identify early investors in each initiative and see if any names come up repeatedly. These investors should become the primary targets for securing funding, but any investor identified in this process should have knowledge of the market and expertise in exactly what the entrepreneur is trying to do. Such investors will likely be more receptive to a pitch, and they will also be capable of providing better guidance.
Find personal connections with potential angel investors.
Contacting angel investors can prove extraordinarily difficult since they receive many pitches and will likely ignore many. The best approach is to find a personal connection. When someone can personally introduce an entrepreneur to the angel investor, then it’s much more likely that the pitch will be taken seriously. Moreover, this strategy allows the entrepreneur to get a better sense of who the angel investor is and how he or she thinks. Entrepreneurs should ask their connection about the investor’s support for other startups, in order to understand his or her business philosophy, willingness to compromise, and expectations following investment.
Provide a comprehensive view of the project with the pitch.
When entrepreneurs focus on winning over investors more than representing their project faithfully, they can quickly enter dangerous territory. Pitches should include as much information about the project as possible without overwhelming the potential investor, and any follow-up questions should be answered candidly. Down the line, if the investor feels that the entrepreneur misrepresented the project, this can seriously jeopardize the funding.
In addition, entrepreneurs should ensure that the investor believes in the project. The partnership will be most effective and rewarding when both parties are fighting for the project to succeed. The pitch should get the investor excited about the project, but it should contain much more than just a hook. If an angel investor passes, entrepreneurs shouldn’t take it personally—not everyone will be a good fit.
Take a look at the angel investor’s connections.
Angel investors have the potential to provide more than just funding and guidance. Often, angel investors introduce promising entrepreneurs to further sources of funding through their connections with venture capitalists or industry thought leaders. With a bit of research, entrepreneurs can check to see if the other startups the angel investor has supported also received funding from other sources, and who provided the money.
This research is important, since such connections are some of the biggest benefits of angel investments. In addition, entrepreneurs should understand the potential drawbacks of seed investments from larger venture capital funds. Often, large VC firms provide seed funding to many companies so that they can invest further in the ones that prove most promising. However, if the firm doesn’t offer any additional investment beyond the seed money, this could raise red flags to other investors, and make it significantly more difficult to obtain further support.
Consider other options available for seed capital.
Today’s culture has pushed many young entrepreneurs to seek out angel investors, but in truth, equity funding is not always the best or only way to raise capital. Because angel investments are typically small, entrepreneurs may also want to consider getting traditional loans or even bankrolling the company using a credit card. Crowdfunding is another choice for raising capital without having a great deal of expense involved. If possible, entrepreneurs should focus on securing an income stream early on. Then, when it comes time to raise funds for expanding operations or developing new products, the company will make a stronger impression on potential investors.