Although not right for all early stage companies, angels and more specifically for this article angel groups, are an integral part of the early stage funding process. While entrepreneurs believe, as they should, that their idea is the next home run worthy of receiving angel investing, all entrepreneurs are first tasked with finding the right angel investor and gaining their attention to attract that critical funding.
Organized angel groups see hundreds of investment opportunities each year and on average only invest in 3-5 deals per year. This equates to 1-2% of the deals they see. So how does an entrepreneur put his/her best foot forward and become that next great investment? Let's take a moment to try and understand more about angels and what angel groups are looking for and why.
Angels are accredited investors that by definition meet certain SEC requirements. They are generally successful professionals and/or successful entrepreneurs. They are usually not professional money managers and are usually not investing as a full-time vocation.
It is important to know that angels invest for a variety of different reasons. They invest because they want to give back to the entrepreneurial community, enjoy looking at different opportunities, and seek to diversify their portfolio.
There is a strong personal component as to why angels invest that includes their desire to build their social networks, experiencing the satisfaction and enjoyment of working with entrepreneurs in their early stage companies, becoming a trusted mentor, adviser or board member, and lending their industry expertise to a company.
But entrepreneurs should not forget or diminish the importance of the angel investor achieving a return on their investment—and that they truly seek a successful exit in order that their funds are freed up to invest in other startups and early stage companies.
Angel investors can also be either active or passive investors—meaning that in the former they seek to have a participating role of some kind in the venture, while as a passive investor they only are seeking financial involvement and return. So an entrepreneur needs to decide which kind of angel they desire—is it only for funding or also to gain help for their business?
Over the past decade or so, individual angels have come together to form angel groups, which have become a vital part of early stage capital markets. The Angel Capital Association (ACA) reports that in 1999 there were less than 100 formal angel groups in the U.S. and in 2016 there were over 400 angel groups in the U.S.
Angel groups very often work together to fund promising companies. The national and local average angel group investment is around $250,000. Entrepreneurs oftentimes need multiple angel groups (or other funding groups like venture funds, economic development groups, grants, etc.) to engage and invest to meet their funding requirements. Entrepreneurs also need to be aware that there is a growing number of angels and angel groups with specific focus on social responsibility, health care, minority investing and other areas of special interest.
There has not simply been an increase in organized angel groups, but there has been a rise in the expertise and education of the individual angels and the collective investment processes. Organized angels are becoming more sophisticated in their approach to early stage investing decisions as to term sheets, due diligence, sharing deals and setting valuations. Simply put, angel groups fill a funding gap vital to the building of early stage companies, but how the groups interface with entrepreneurs has changed over time.
Because of this, entrepreneurs need to be more strategic as they seek early stage investment. An entrepreneur needs to be prepared for the time intensive process of raising early stage capital. After all, angel investors are giving the entrepreneur their own hard-earned money and therefore have high expectations.
Remember an investment relationship with an angel or angel group can be more like a marriage then just a blind investment. The parties may be dealing with each other for a number of years, and therefore it is extremely important that a strong relationship be forged during the investment process.
So knowing this, how can an entrepreneur get their company in front of angels and/or an angel group?
Here are some tips -
- Networking is key - go to events and meet as many people as possible.
- Get a referral - a warm introduction is always better than just submitting a blind plan.
- Find a champion - find that investor who gets what you are doing and will help your efforts.
- Find an early adopter (client) to prove your product/service is viable.
- Pick the right events, venues and angel groups to present to - know what you are walking into.
- Research the angel and/or angel group and make sure your company matches their investment criteria.
- Nail down your pitch, presentation, and materials - you only get one shot to make a good impression.
- Make sure the amount of funding you are raising is correct and will get you to the next level.
- Correct valuation is critical - this is the hardest task to do, but you need to be in the ballpark when you approach angels. This could be an instant deal killer if you are way off.
- Make sure you address exit opportunities and timing expectations for an exit. Exit possibilities and potential have become more of a focus for organized angel groups.
In summary, there is funding available to entrepreneurs, but entrepreneurs need to do their homework on who the right angel investor is for their venture. They should realize that angel groups have become better organized, so on the upside the angels collectively can meet more of the needs of entrepreneurs. But on the downside, the groups have more defined expectations about what they require from the entrepreneurs seeking funding—who need to better understand the fund raising process and be strategic in their approach.