A simple guide to angel investors
All startups need an initial injection to get the business off the ground. Unfortunately, raising capital continues to be a struggle for many entrepreneurs.
One of the options entrepreneurs have is to approach an angel investor. An angel investor is typically refers to a high net worth individual – family or friend – who provides capital to startups. These special type of investors are referred to as “angels” mainly because they are investors that invest their personal funds in a struggling company when no one wants to come to the rescue.
Angel investing in South Africa has, for a long time, been viewed as a private club for the wealthy but there are many angel investors out there who support entrepreneurship like FNB Private Clients. Another local example is Shanduka Black Umbrella. They are an angel investor group focusing on developing 100% black-owned businesses.
- See also: All your crowdfunding questions answered
We talk to the team at Angel Hub Ventures, an Angel seed fund, who explains what you need to know about approaching angel investors. They share insight on the type of startups that angel investors are looking for, to some of the disadvantages of dealing with these particular investors and everything in between.
What is an angel investor?
Angel investors usually are some wealthy former entrepreneurs or executives that have business experience. They provide capital to early stage businesses usually in exchange for equity or convertible debt. Angels generally only invest in companies that they believe have an earning potential.
What is the difference between angels investors and venture capitalists?
Angel investors fund enterprises earlier in the investment process and invest smaller amounts of capital compared to venture capital (VC) funds. They are more independent than VC funds as with VCs it’s often an individual or group of individuals involved in the decision making process. Angel funds typically have smaller investment committees and are more flexible than VC funds. VC provides funding later when growth potential is more evident, or for when the enterprise is ready to expand.
How do I know if my business is suited to an angel investment?
Angel investment is the right source of funding for only a small proportion of entrepreneurial businesses. When considering yourself for investment by an individual angel or angel group, ask yourself: are you willing to give up some amount of ownership and control of your company? Can you demonstrate that your company will produce a significant return for investors? Are you willing take the advice from investors and accept board of director decisions you may not always agree with? And lastly, do you have an exit plan for the company that may mean you’re not involved in 3 to 7 years?
When should I approach an angel investor?
Each fund or investor operates differently regarding their preferred portfolio company. Some prefer tangible traction in a market whilst others are comfortable with taking on concepts that show potential with a small amount of further development. These investors do not invest in ideas, there must be something tangible behind what the entrepreneur is saying and has achieved. The funding is typically required for final stage development, marketing and distribution.
What do angels look for in a business venture?
What remains constant is what these investors expect from their portfolio company. Angel investors and VC firms expect significant growth. Aggressive growth (or growth potential) is a prerequisite, this goes hand in hand with scalability. Good ideas that can create potentially successful small businesses are not within the mandate of these funds. The risk is significant and, with that, comes significant expected return. Some of the investments are expected to fail due to the stage of business development and, thus, must exhibit significant potential to compensate the investor.
What process can I expect if I apply to an angel investor for funding?
The general process differs across funds and investors but typically the entrepreneur will apply to be funded, should the application seem interesting and aligned with the mandate of the fund, they will be invited to pitch. Several discussions take place between the fund and the entrepreneur to get to understand the business. A rigorous due diligence is then conducted and based on the outcome; an investment is made or denied.
Will angel groups sign non-disclosure agreements? If they don’t, how do entrepreneurs protect confidentiality?
During the initial portions of the evaluation process, the vast majority of angel organisations will not sign non-disclosure agreements. Angel groups just see too many deals, often in a similar space. When submitting executive summaries and even business plans, the entrepreneur needs to explain the business so that the potential investors can understand the company’s opportunity for success, but don’t learn about any confidential issues. If you have intellectual property that has not been patented, it is best not to disclose it to the angel group when you are first submitting your company for investment.
What are the advantages of using an angel investor?
Using an angel investor provides significant advantages. Most of these investors/funds have been successful in their industry. Their contacts and potential distribution capabilities may provide a platform off which to leverage significant expertise and market accessibility. Because their stake in the business is significant, the investor is incentivised to incubate the entrepreneur, providing strategic and business development guidance. Crucially, the investor is not going to run your business for you. It is assumed that this is your passion and that you understand your business well enough to handle the operations.
What are some of the disadvantages of using an angel investor?
The first involves the risk of sacrificing too much equity and, thus, control in a deal. Angel investors are cautious to ask for too much as this may disincentivise the entrepreneur who needs to be fully committed to the venture. The second involves the risk of getting an angel on board who adds little value other than a cash injection. Angels add value through their networks and distribution options. Being able to leverage off their expertise and potentially other portfolio companies is extremely important for accelerated growth.
How do I find an angel group or investor?
Because some angels and angel groups are more likely to invest in firms that are recommended by people they know and trust, it is important to network in your community to gain a referral. Examples of people to contact include: entrepreneurs who are backed by angels or venture capitalists, attorneys who