Finding an angel investor: How to navigate the process

An angel investment is often the first outside capital a startup founder will seek. Here are some tips to help you find an angel and negotiate the investment.

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Angel investments -- capital invested in a startup by an affluent individual or group of individuals -- is often one of the first instances of outside capital that a founder will see in his or her startup. In 2013, according to a Reynolds survey, there were around 750,000 angels in the US alone.

For US founders, that is more than 750,000 chances to get your startup funded, to bring your idea to life. With the proliferation of internet communications, those chances extend far beyond the angels in the US. They are now available to founders all over the world.

Online groups like AngelList and Gustare prominent in startup communities, and a booming mergers and acquisitions market has left entrepreneurs with excess capital they can use to fund new companies.

Capital received from an angel investment is often one of the single most important catalysts for a founder trying to get a startup off the ground. Here are some tips to help you find an angel and navigate the funding process.

Finding an angel

According to Andy Gibbs, the president and CEO of ScienceStyle Capital Partners, the typical angel investor profile has changed considerably over the last few decades. When he started looking for funding, angels were typically folks with long careers in business and had a wealth of business knowledge. Nowadays, he said, there are some investors who are high-net-worth but without decades of business knowledge.

Gibbs said that some of the latter have an emotionally-driven interest in a market opportunity, and Gibbs is looking for business knowledge.

"I still look for angel investors who are very sophisticated investors, sophisticated business owners, or sophisticated business managers; not the young guys who are looking for an emotional investment," Gibbs said.

So, you should know what kind of investor you are looking for. Much like finding a VC, choosing an angel is a targeted approach. Take time to do your research. Find the investors who invest in your space, and make sure the amount of capital they are willing to invest lines up with the amount you are trying to raise.

Alex Frommeyer, CEO of Beam Technologies in Louisville, Kentucky said that you'll want to avoid just looking for someone who will give you money.

"In smaller markets, an entrepreneur has fewer angels (and typically less aggressive at that) to choose from, so sometimes the strategy can boil down to 'whomever is excited to cut a check'," Frommeyer said. "However, that is a terrible situation, because it gives serious negotiating leverage to the investor, as well as sets up the potential for a bad relationship."

When it comes to finding angels that can add value outside of just capital, the process can take a long time. For Frommeyer, his journey to finding an investor began years before he was even ready to take funding. As he was considering his startup, he was networking with thought leaders, vetting potential investors, and building credibility in his local startup scene. While this might not be the approach for everyone, it's a best practice to get to know people and, more importantly, let them get to know you.

Getting to know potential investors, or any potential stakeholders in your startup for that matter, is of utmost importance. Sure, online options are growing, but most investors put their trust in people, not companies. Some investors will tell you that the team behind the idea is more important than the idea itself.

"If an entrepreneur is considering starting a new venture that will require outside investment capital, arguably the worst method is to approach a potential investor for the first time with the premise that he or she should give you money for a risky new business. It's often more effective to have met potential investors in another setting," said Greg Langdon, a startup investor and advisor.

Of course, meeting in person may not always be possible. In that case, you should leverage the strength of your network and see if someone can introduce you. As Langdon said if you can't get in front of someone, "word-of-mouth introductions still carry much more weight than a cold call or an email."

Steering the ship

At the root of it, an angel investment is a legal contract, and there are a ton of moving parts to consider. Before you step into a negotiation, try reaching out to other founders to see what their experience was like.

"The best person that an entrepreneur can have on their team during negotiations is a fellow entrepreneur who has been there, done that. Not one who just raised money last week, but one who has raised money and run the business for a good, 3, 4, 5 years and has a track record with a venture capitalist," Gibbs said.

When you reach the point that you are ready to start negotiating, the investor will typically have a lawyer with specialized knowledge, and both Frommeyer and Langdon said that founders should have one too. There are typically many different considerations to make about the company and Langdon said, "Fundraising isn't the place to save a few dollars on legal services."

Gibbs, on the other hand is averse to the idea of bringing lawyers into the process early as he has been through fundraising with multiple companies and knows exactly what he wants his term sheet to look like.

"I don't bring the lawyers in until I have the term sheet that defines all of the terms of the deal. So, the deal is done. The deal is negotiated before a lawyer gets his hand into any of my deals," Gibbs said.

It's up to you whether or not you want a lawyer on your side early in the process. What you should note is that the investors will typically have more leverage in the negotiation process, being that it is their money on the line. However, Langdon mentions that these characteristics can help you gain leverage in negotiations:

  1. Successful track record at a previous startup
  2. Significant, protected intellectual property for the new business
  3. Strong, experienced team of founders
  4. Unique approach to selling that generates more customers at a lower cost than competitors
  5. Demonstrated traction with customers that validates the startup's business model

While it may seem like you are getting ready to sign over the birthright of your firstborn child, remember that this is all part of the process.

"In short, don't take it too seriously," Gibbs said. "Get a business up and running. Angel investors, or any kind of investors, typically want to see a cash out within three to five years. So, look at your first startup and your first investment as your first, not your only. Get over it, get over yourself. Understand that there will be business no. 2, business no. 3, business no. 4, and the first one is the entry to the learning curve."

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