Overview
The year 2021 was an incredible year for most of the start-ups in the Indian start-up ecosystem, either from the perspective of the volume of investment inflows or the number of Startups entering the coveted unicorn club. Most experts believe that such an overwhelming response from the investors is likely to continue throughout this year also with the value of angel investors in the ecosystem only set to increase.
Angel investors are the individual investors who typically invest their own money making early bets into Startups that may or may not have a very promising future ahead. Some of the prominent angel investors include Rajan Anandan(Partner, Sequoia Capital), Kunal Bahl(CEO of Snapdeal), Kunal Shah (Founder of CRED), Ramakant Sharma (Founder of Livspace) or Anupam Mittal (Founder of Shaadi.com), who were keen to put their faith back into the ecosystem and prominent entrepreneurs like who emerged as leading angels in 2021.
Generally, when the Minimum Viable Product is developed by the start-up, they need funding to move towards the next step, which may be refining the product or product launch and gaining traction. At this point, entrepreneurs try to raise funds from either venture Capitalists or Banks/Financial institutions. However, banks or financial institutions are reluctant to lend funds without sufficient collateral, whereas Venture Capitalists are unlikely to invest in businesses that haven’t already developed a product with some proven market viability.
Angel Investors play a critical role in bridging the gap between innovative early-stage start-ups and their financing needs including their larger capital needs from venture capitalists, and corporate investors in the later years, all the way to becoming a listed public corporation. Accordingly, if you are a start-up in its pre-revenue phase, angel investors would be the best option for you to raise money. Read further to find out about angel investors, and how to approach them and raise funding for your start-up.
What is an Angel Investor?
Angel investors are individuals with high net worth who make investments in early-stage start-ups into the formation of a new startup company, generally in exchange for convertible debt or equity. Typically, most angel start-ups use their own money to invest in promising start-ups and are ready to take more risks, especially for early-stage start-ups.
Unlike venture capitalists who provide money to start-ups & businesses from pooled money from many other investors and place them in a strategically managed fund, angel investors use either their own money or from a pool of angel investors. The funds so offered may be either a one-time investment to help the business to get off the ground or pumping funds into the system for any specific purpose during its difficult early stage.
Angel investors could be from any professional background from engineering to finance, business associates, or even other successful entrepreneurs. They are not motivated by profits and concentrate on startups’ success instead. As compared to other investors, Angel investors are more likely to offer funds at more favorable terms as compared to any other lender as they invest in the belief and passion of the founders towards their goal rather than the scaling prospects of the business.
Since most angel investors are experienced executives who have worked in top companies, thus they are passionate about helping businesses to make the right decisions. Rather than just focusing on the ROI from their investments, they dedicate themselves to helping start-ups to take their first steps by taking risks that are worth it. However, due to the high risk involved in early-stage start-ups, professional angel investors generally look for opportunities to explore options such as a defined exit strategy, acquisitions, or initial public offerings (IPOs).
How to raise Angel funding for my start-up?
If you are an entrepreneur looking to raise funds for your start-up in the early phases, here are some things that should be religiously followed to reach a good deal from the Angel investor for your start-up-
Find an Angel Investor
When you are looking to raise funds for your business, make a list of angel investors who have either expertise in the particular industry or people who have either currently or in past invested in any business working in a similar industry and try to connect with them as these people are in the best position to understand the value of your start-up or the viability of the products/services.
Personal connections & referrals are crucial for fundraising purposes, so start looking within your network for well-heeled industry insiders or established entrepreneurs. Also, you may connect with affluent angel investors with professional networks such as Twitter or LinkedIn or through some reliable angel networks are Angel.co, Investment Network, Let’s Venture, Your Nest, etc. You may also send an elevate pitch to your desired angel investor and see if he is interested.
Build a Warm Connection with Angel Investors
However, if you do not find any, you could follow your angel network with others by joining investors’ groups, attending business meets and joining the Indian angel network, etc. where you can know them better or even offer them an invitation to join your team as an advisor or on your board of directions. Once you establish a warm connection with them and they got to know more about your business and might be interested in investing or you can ask them for an introduction to angel investors who might be interested in your company.
Do Your Homework in Advance
Before pitching your idea to angel investors, the founders should keep a hold of all pertinent information related to the business such as gross profits, profit margins, revenues, profit and loss account, income statement, and financial position of the start-up, etc. If the angel investors are impressed by the pitch, they may need all such numbers, and having such information beforehand will help you get a good offer.
Make it a priority to do proper research
In case you are new to the start-up ecosystem, you must choose your target audience and understand their requirements and preferences deeply. And since angel investors are someone who has been making investments in certain products/services for years, it would be a bad idea to present a vague idea with a belief that it will work.
Angel investors may only invest in your start-up if they feel impressed by your knowledge, passion, and research for the business idea and how the founders aim to market it and how can it results in higher profits and growth for the business.
Prepare yourself before meeting an Angel investor
But, before meeting the angel investor here are a few things the entrepreneurs should be prepared for meeting potential investors-
- Clear & concise elevator pitch for your start-up
- Solid demo for the product/service being offered by start-up, as a solid demo could communicate already what you are trying to achieve.
- An Executive summary/pitch deck that explains your product is fit for the market, including the realistic short and mid-term projections. It should explain how the product is a market fit from its existing competitors in the target market,
- Funds required and the manner of utilization
Right Timing to Approach an Angel Investor
Though there are higher chances that angel investors will likely take chances in an early-stage start-up, still the entrepreneur needs to be far enough to pitch a deal with the angel investor to persuade him to invest in the start-up. In other words, the start-up should have its minimum viable product ready or should be pretty close to finishing it. Then angel investment would help the developer to finish or refine the product or build a specialised sales and marketing team to help your product gain traction.
Stay Confident with a powerful presentation
The chances of impressing an angel investor increase when you present your business idea with confidence and tailor your pitch in a way so that the angel investor can connect with it. Since, angel investors put in a lot of money, and thus their fundamentals are even more crucial to them, it is also important to keep the presentation and pitch professional, concise, and comprehensive. During the presentation, the investors generally want to understand the problem the start-up is trying to solve, its commercial viability, and the confidence in the management team.
After your successful pitch, you will be required to present your business plan and product prototype to the angel investor. Rather than worrying about your performance, try to emphasize your passion for your business idea, and how will you scale your business in the future.
Demonstrate your past successes
During the business pitch, it is also a good idea to exhibit any successful records of your previous venture(s), which could persuade angel investors to come on board and invest their capital in your business. As no investor wishes to lose all his hard-earned money invested in the start-up, showing adequate credibility on your part may help them believe that you can nurture your startup once adequate funding is provided.
What do Angel investors look for in a business to invest in it?
Here are a few factors that angel investors will take into consideration while making a ‘make or break decision for investment-
Belief & Commitment of the Founders
For any successful start-up, the genuine beliefs and commitment of the founders to their customers are strong motivating energy for any business. Rajan Anandan, one of the top angel investors in India, emphasizes the fact that he would place bets on a start-up upon a team of founders who are solving a real problem, have tenacity &vision, could build up a team, and raise funding for their start-up.
Traction and scalability of your business
Secondly, angel investors look to invest in start-ups that have gained early traction for scalable business. Business traction implies that the concerned start-ups are gaining momentum in a growing business such as growing consumers, increasing sales, etc. Whereas having a scalable business implies its ability to increase revenue with a minimal incremental cost. For instance, in case the start-up is offering an innovative software service, the costs of making its first copy of the software, however, any number of additional copies could be cloned under a minimal cost.
Have a reliable management
Since the start-up business is new, angel investors like to interact with the founder’s team and management team to access their quality. Given the significant risk, angel investors are more likely to invest in founders with strong leadership skills, sharp business acumen, and the ability to adapt rather than just the business idea.On a personal level, angel investors prefer to back entrepreneurs and in the vision of the leadership team.And, in case they have doubts about their ability to execute the vision, the decision may not be positive.
Size of the target market
The market size and target population are crucial factors for any business. Thus, if your product/service is appealing to a larger population, investors would like to invest in your idea.
Viable Exit Strategies
Though, their main motive is more than just lending funds to a business no investor wishes to invest his money in a business that cannot guarantee returns. Therefore, they look for a pre-defined viable exit policy to reap the benefits of their investments. An exit strategy needs to be thorough and investors expect the same to be presented during the business pitch. Having an exit policy in place provides a sense of security with a sense of common understanding regarding when to expect returns and, more importantly, how they can mitigate their losses.
Further, the exit strategy may include the sale of shares to the founders of the company by exiting angel investors, or in the case where the business gets success to a point, it may also go for an IPO through which it could get its ROI.
Clarity in the Investment Options
Generally, Angel investors prefer to have flexibility in their investment options. They may either decide to offer funds as a one-time sum or in multiple installments over time. Likewise, they may either wish to offer the funding with loans with any warrants attached to it or may seek a stake in the ownership of the company. For this, the founders may approach the investor with a solid shareholder agreement that provides for the contingencies of their investment.
Thus, the investment option needs to be structured in such a way that it is equipped for handling equity investments and the business owners are comfortable sharing a certain amount of business control with the angel investor.
Involvement Opportunities
Since angel investors invest in promising early-stage start-ups and apart from funds they wish to provide the necessary mentorship and guidance to take the business to the next level. Thus, they are expected to participate actively in the business growth strategy in different forms either as a consulting mentor or being one of the board’s directors. It allows them to get involved in the day-to-day crucial business matters enabling them to play a more active role in building a business that they have invested in.
The Business Plan
After you present your business pitch, the investors would like to get a detailed business plan with the expected short-term and long-term growth projections, marketing strategies, and market research. They may also look into other metrics like burn rate, cost of customer acquisition, and gross margins for the business.
Bottom Line
Allan Riding, a professor at Carleton University, Canada once stated “For every dollar angels put into a business, they wish to earn at least seven dollars out after taxes after seven years. Thus, angel investors are an ideal choice for early-stage start-ups and entrepreneurs since they provide hands-on guidance and mentorship apart from financial support and are more patient with results.
Unlike traditional venture capitalists, angel investors do make their decisions quickly and only in rare cases take a position on the board as a condition of offering business support. Unlike venture capital firms, they typically offer smaller amounts which also makes them an attractive funding option for start-ups who need minimal funds and wish to retain more ownership and more guidance on their plate to save themselves from failures.
Due to all these reasons, angel investing has grown drastically over the past decade as the lure of profitability has allowed it to become a primary source of funding for many Startups. However, it is advisable to go for a highly attributed investor who is rational, holds strong experience in the field, has a certain risk appetite, and has realistic expectations, all of which will help your business to reach new heights, and ultimately foster innovation which translates into economic growth.
