Need money to fund or expand your startup? Forget venture capital. For 99% of today’s startups, VC money is a pipedream. Angels are the way to go. They are more plentiful and better organized than ever, and hooking up with them has never been easier (not easy, mind you, but easier than it once was).
Consider Mark Risher who recently sought funding for his internet security firm Impermium. He found funding heaven at a new place called AngelList. “Within hours of posting we had dozens of qualified, top-shelf investors and by the end of the day we were 100% oversubscribed,” he says. “At first we were reluctant, thinking the semi-impersonal list might be a last resort after personal introductions dried up. But my only regret is that I delayed for so long.”
Angel investors have become a key force supplying startup and early stage capital to tens of thousands of promising young companies yearly. Angel investors are actively looking for ventures to back. Once conducted largely behind the scenes, the angel investment process has moved more into the open. Some angels act solo, but today’s angels are more likely to work through angel investor groups that have proliferated nationwide.
Angel investors and venture capital (VC) firms are different animals. Angels invest mostly in startup and early stage businesses. VCs provide growth capital for businesses further along. The good news for entrepreneurs is this: Locating angel groups, learning how they work, what types of startups they are interested in, and finding out the exact process for how they can be approach, has become easier thanks to websites such as AngelList as well as organizations such as the Angel Capital Association (ACE) and the Angel Capital Education Foundation (ACEF).
ACE is North America’s professional alliance of angel groups, bringing together over 6,500 angel investors. ACEF is a non-profit founded by the Kauffman Foundation, a premier organization that supports entrepreneurship. ACEF does not make investments, but provides information and links to support the process. The “Entrepreneurs” section will tell you:
- If your type of business is right for an angel group investment
- When to approach an angel group
- What criteria angel groups use to select entrepreneurs to back
- What process you can expect to apply for group funding
- Whether you should expect to pay fees to participate.
The investment process has numerous steps, including an initial application, pre-screening, screening, investment meeting, due diligence and, finally, a term sheet offering if you make it all the way through. About one in three angel groups charges a fee to present your idea. For those groups that do charge, the average application fee is about $150, and the average presentation fee is $500.
FindVenture.com is another great place to look. This site has partnered with leading venture funds and angel groups to form a kind of “capital exchange” that connects investors with small biz owners and entrepreneurs seeking funds. FindVenture uses a computerized system to scientifically match investors and entrepreneurs. Getting your funding request on this site is a great way to help get yourself on the map.
You can also search for angels on the ACE website at AngelCapitalAssociation.org. Go to the “Directory” section which lists most members of the organization. Groups are organized by state, region or country, such as California, New England or Canada. The directory includes a link to each member’s website where you can learn more about that particular group, including investment preferences and application process.
Here are three “must know” tips about finding and approaching angels, from the non-profit Angel Capital Education Foundation:
- Angels are not venture capitalists (VC). Angels invest their own personal funds in a business. VC money usually comes from institutional sources. Angels also back startup and early-stage businesses, while venture capitalists prefer later stage companies. Individual angels invest $5,000 to $100,000, while VC investments go $2 million and up.
- To attract angel interest, be willing to give up some ownership or control of your business, and be able to show a significant return within 3-7 years, as well as a profitable exit strategy.
- Seek angel funding when: a) your product is fully developed; b) you’ve already invested your own money and exhausted other alternatives (like family and friends); c) you have existing or confirmed potential customers; d) you can demonstrate that the business is likely to grow fast and can pass $10 million in revenues within 3-5 years.
For small sum, tech startup backing, check out Y Combinator. If you have a startup idea in the software or web services area and need between $5,000 and about $20,000, step up and submit your idea. These savvy startup funding folks are more interested in good ideas than slick business plans.
Thinking of placing a pitch on AngelList? Here’s their advice on how to write it:
“We look for the same things that early-stage investors look for: traction, market and team. Social proof also helps when you’re trying to get a first meeting. So you need to kick ass in at least one of these areas. Before you pitch investors, build a minimum viable product, put it in front of customers, and learn something about product/market fit. If you can’t get this far on your own, find some idea investors instead. Then write a 150-word elevator pitch and apply to AngelList. Our elevator pitch template is a good place to start. Spend time writing and re-writing the pitch until it’s awesome. Get feedback from good writers and entrepreneurs who have raised money.”
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Filed Under: Angels
About the Author: Daniel Kehrer, Founder and Chief Content Officer of BizBest Media, is a senior-level leader in digital media, content development and online marketing with special expertise in startups, SMB, social media and generating traffic, engagement and leads. He holds an MBA from UCLA/Anderson and is a passionate entrepreneur (started 4 businesses), syndicated columnist, blogger, thought leader and author of 7 business and financial books.