$18 billion dollars. That’s about how much angel investors provide in investment
per year. Yet angel investors typically reject three quarters of investment
proposals sight unseen. How do you get an angel investor to invest in your
business? What are angel investors looking for?
1. The potential for a solid return.
Angel investors invest with the expectation of doing more than just getting their
money back. They expect a good return on their investment – a return better
than they can do on the stock market. In most cases, for every dollar that
an angel puts into a company, he or she would like to take seven dollars out, after
taxes, in seven years.
2. A good reason to invest.
Remember that most angel investors are or have been successful entrepreneurs.
They enjoy the thrill of helping to build and create a thriving enterprise.
However, there are three categories of angel investors, the economic, the hedonistic
and the altruistic*, and each type has their own reasons for investing. While
a hedonistic angel investor is most attracted by the excitement of creating something
new, an altruistic angel investor may be most concerned about helping his community
or attracted by the potential of developing environmental technologies. Determine
which category of angel investor you’re trying to attract and tailor your pitch
accordingly.
3. A solid management team.
A solid, complete management team with leadership ability is a must if you hope
to attract angel investors. Essentially an angel investor is investing in
people, so he or she needs to see the evidence that your business is in the hands
of people who are knowledgeable, competent and trustworthy – and possess the skills
to lead your business to the next level. For most businesses, a complete management
team will include skilled, knowledgeable people who know about marketing and selling
products, manufacturing, managing people, and accounting.
4. A solid business plan.
Angel investors want to see a business plan that’s both convincing and complete.
They want to see that you’ve developed a vision for your company and that you’ve
given thought to the details of how to get there. They want to see things
such as financial projections, detailed marketing plans, and specifics about your
market.
5. A business structured for investment.
While some angel investors invest by giving loans to a business, minority equity
ownership position is the preferred choice for more than half of angel investors.
This means that your business has to be structured to allow for investment (and
that if you are the sole owner of your business, you have to be prepared to give
up a certain amount of ownership if you want to attract angel investors).
Most angel investors will expect a formal shareholder’s agreement which lays out
the nature of their investment and the return.
6. The opportunity to be actively involved.
For many angel investors, it’s not just about the money; they want to actively participate
in developing your business. They want to act as a mentor and sometimes even
to take an active role in managing the company. This often translates into
the angel investor having a seat on your Board of Directors.
7. A viable exit strategy.
Before he or she invests in your business, an angel investor will expect to see
an exit strategy. While angel investors are patient and willing to make long-term
investments, they need to see how they’re going to reap the return on their investment.
The sale of shares to the company’s principals is a common exit strategy for angel
investors who hold equity ownership positions; the sale or merger of the company
is a common exit strategy for debt-holding investors. Don’t be surprised that
your prospective angel investor wants a time-frame set.
In sum, if you want to get an angel investor to invest in your business, you have
to ensure that your business is investor-ready. If you haven’t already done
so, preparing a solid business plan, restructuring your business as necessary and
completing your management team are the best ways to start preparing to attract
an angel. Then you’ll be ready to tailor your investment pitch by incorporating
the other things that angel investors are looking for.