How to Fund Your Business With Angel Investors Angel investors are individuals who use their own money to back entrepreneurs they believe in.
By Eric Butow Edited by Dan Bova
Key Takeaways
- Angel investors invest their own money.
- Angel investors tend to have a people-first philosophy when choosing which businesses to back.
- There are many digital networks that connect entrepreneurs with angels.
- Angels tend to start with small investments and add as they see progress.
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This is part 7 / 11 of Write Your Business Plan: Section 2: Putting Your Business Plan to Work series.
If you are having trouble getting funding for your venture under the right terms, or under any terms at all, you'll be glad to know about the existence of angels in the investment world. Angels are individuals who invest their own money, as opposed to institutions or professional money managers, who invest other people's money. Many angels are well-off professionals, such as doctors and lawyers. Some are retired but have tremendous expertise to share in a specific field. Others are successful small business owners who have made a bundle with their own entrepreneurial efforts and are now interested in letting their money work for them in someone else's venture.
Because angels invest their own money, you might think they are the most discriminating, difficult-to-please investors. In fact, they are as a rule much more willing to take a flier on a risky, unproven idea than are professional investors and lenders.
Related: 6 Ways Angels and VCs Think Differently
That's not to say that they won't do their due diligence, but angels often take a personal interest in a project and may simply believe strongly in the person behind it…that's you! They are usually swayed more by personal concerns than by financial ones.
Note: [Due diligence refers to all the things an investor should do to check out an investment. It has a legal definition when applied to the responsibilities of financial professionals, such as stockbrokers. In general, it includes such things as requiring audited financial statements and checking warehouses for claimed inventory stocks.]
Finding Angel Investors
While angel investors used to be located primarily by word of mouth, they are easier to find in the electronic age. The Angel Investment Network helps angel investors and small businesses seeking capital meet online.
The Angel Capital Association is another place to learn about angels and seek out an angel network—a local group of angel investors in your area. Visit them at www.angelcapitalassociation.org.
Keep in mind that angels are, above all else, unconventional. Many have little training in evaluating business ideas. If twenty angels turn you down, it doesn't mean a thing. Until you've gone through the last name in your Rolodex, you still have a chance of landing an angel backer.
Related: 7 Important Differences Between Angels And VCs You Need To Know
Tim Berry describes the path to finding the right angel in his article "How to Land Funding From Angel Investors," writing:
Consider Harold Lacy's "six degrees of separation" method. Your angel might be somebody you know, recommended by somebody you know, or a local investment club, business person, perhaps even a local development agency.
Angel investors often focus on local markets, specific industries, and affinities such as college or university alumni. Your search should include looking for angel groups related to the college or university from which you graduated; your town, or state; and the industry you're in.
Use web search. Search for "angel investors in [your area]" or "angel investors [your type of business]" or "angel investors [your college or university] alumni."
Related: Glamour of VC Funding VS Patronage Of Angel Nurturing
What Angels Investors Are Looking For
You may also fit angel guidelines if you don't need a whole lot of money. Institutional venture capitalists can, by pooling the funds of several different groups, raise vast sums. It's not unheard of for venture capitalists to invest nine-figure sums—more than $100 million—in relatively new, unproven ventures. Even Bill Gates or Warren Buffett is unlikely to feel comfortable sinking that kind of money into anything uncertain. Your angels' capacity will vary, of course, but angels tend to start small and see how you are doing before adding to the pot. One of the nicest things about the angel networks that have formed in recent years is that they can pool their resources, giving you a few angel investors in one place at one time. This also makes it easier when you are preparing to meet with angel investors. Rather than meeting one at a time, you can meet several in one angel network or even a couple who will spread the word among their partners so that they can decide as a group.
Related: 3 Things That Make Angel Investors Want To Invest In You
If you're after angels, it's in your interest to guard their interests. Unsophisticated angels may, for instance, give you money without specifying exactly what they are buying, such as percentage of ownership. Such angels can be taken advantage of. But you may want more help someday, and angels tend to talk with each other. So make it legal, make terms clear, and take care of their interests.
Related: Where To Find Angel Investors
