Startups need funding. Initially, founders fund a startup. After that sometimes friends and family members fund a startup. These friends and family members act as angels to the startup and invest their money generally on just the relationship with the founder(s). After these sources are exhausted generally a startup has to look outside for funding. The first people a startup can approach for funding are professional ‘Angel Investors’.
Angel investors are people who take a risk in the early stages of a startup by funding that startup. I have personally met many professional angel investors and I can say for sure that angel investors come in a large variety. Even though it is difficult to generalize about angel investors but generally professional angel investors are high net worth individuals (HNIs) who want to invest their own money in the early stages of a startup. They want large returns. Some want 10x returns while others want 100x returns. Generally, however, we can safely say that most angel investors want a return of 25x in 3 to 4 years. Angel investors generally invest smaller sums of money than a full-fledged venture capitalist. In India generally, angel investors invest from anywhere between Rs 5 lakh (USD 7K) to Rs 1 crore (USD 140K).
These days angel investors have started forming networks. These are called angel networks. Angel networks allow individual angel investors to get economies of scale in certain areas like due diligence and the ability to access large pockets of startups. For example, many angel networks reach out to renowned universities in the USA and IITs in India for investment. It will be difficult for individual angel investors to reach out to startups in these institutions at scale.
Another big benefit of angel networks is that they allow angel investors to pool in money and invest together. That reduces the risk for angel investors. I know of big angel networks in India that allow many investors to invest as low as Rs 5 lakh in multiple startups. This hedging reduces risk considerably for the individual investor.
Angel networks also have standard legal processes and thus individual investors find it convenient to invest through them.
Thus a budding entrepreneur should try to reach out to both individual angel investors and angel networks. Angel investors generally focus on at least 4 things in a startup before investing:
- Personal qualities of the founder(s)
- The problem which is being solved by the startup
- The solution finalized by the startup to solve the problem
- The scaling potential and probability of the potential solution to be executed by the founders
Thus generally it is better for entrepreneurs to reach out to angel investors after reaching ‘problem solution fit’. The probability of getting investment is many times higher after achieving problem solution fit.
The entrepreneur should create an ‘elevator pitch’. Elevator pitch is a 2-3 line introduction to the startup. Within 30 seconds to 1 minute, the entrepreneur should be able to tell the startup to the potential investor. If within that time the investor does not hook up then generally the investor will not go ahead and ask for a ‘pitch deck’.
A ‘pitch deck’ is a slide deck that lists out the following information as clearly as possible:
- Introductory Slide (elevator pitch)
- Why Now?
- Why Us?
- Business Model
If the angel investor likes the pitch deck he or she will generally want to explore the startup more. A few rounds of discussions will be held with the founders and sometimes even the core team. The angel investor will also do some initial due diligence and if all goes well then the professional angel investor will sign a ‘term sheet’ with the startup. After the term sheet signing the angel investor will generally do detailed due diligence. Once that is complete and no big issue arises the investor will sign definitive legal documents for the investment and give the money according to the agreed schedule and milestones.
Individual investors may focus less on some legal aspects due to logistical issues but generally, angel networks do follow the proper due diligence and the process described above.
The biggest question an early-stage startup founder has during the initial period is how to reach out to potential angel investors. In my experience, there are multiple ways of reaching out to professional angel investors. A good way is to attend big startup conferences. Conferences like SXSW or conferences organized by The Indus Entrepreneurs (TiE) in India and the USA are good events for this.
Another way to reach out to angel investors is to reach out to them on Twitter or LinkedIn. All investors may not reply to the messages but if you write to 10 investors, some of them will reply.
A good way in which most investors prefer is to reach out through some person in the network of the investor. Try to build a strong network with people in the startup ecosystem. They can refer you to their angel investor friends. Becoming part of the incubation programs at startup incubators and startup accelerator programs do help here. Incubators and startup accelerator programs have good connections with investors. Their reference carries weight in the industry.
Another good way is to create some social media buzz about your startup. That really helps to reach out to investors. Investors are more receptive to cold emails and messages from startups they have heard about.
Another good way is to reach out to angel networks. Angel networks have professional processes for vetting startups. You can reach out to them through their websites. For example, this is the link to such a page on the website of Indian Angel Network (one of the most reputed angel networks in India): https://www.indianangelnetwork.com/dashboard/submit-new-plan.
Another good way to get to angels these days is to take part in professional pitching contests. Many organizations like government startup programs and TiE etc hold such pitching contests. They generally call professional angel investors and senior executives from big startups for judging these contests. If these people like your pitch they will be receptive to talk more with you. These people may become potential investors or introducers to investors.
The most important thing at this stage is the network. The bigger and deeper your network the better it is. If you are in India, I would recommend joining the local chapter of The Indus Entrepreneurs (TiE). They do a lot of events and initiatives to help entrepreneurs increase their network and reach out to professional investors.
Getting angel funding is important for many startups who do not have enough capital to sail through the ‘build’ stage. If you have multiple co-founders then one co-founder should spend a large amount of his or her time on building the network with investors and pitching in front of them.
Finally, I will like to tell you that not every angel investor will fund you. Some of the iconic startups we admire today had to go to multiple investors before getting funding. Thus if you have to reach out to 10 potential investors for getting funding from just 1 investor do not lose heart. This is normal in the funding process. I have seen entrepreneurs closing startups after talking to 3-4 investors. Do not lose confidence. Many investors will ask tough questions. Try to learn from them and answer the same questions to the next investor with more preparation.
Angel investors can provide more value than just money. They can give you free mentoring and also a built-in network. Do not choose angel investors only on money. Focus on knowledge, experience and network they will bring along with money. Try to deduce all these parameters before taking funding from an angel investor. Another important thing that angel investors can bring is their reputation. If an iconic angel investor invests in your startups you will get media coverage, better employees, better funding later on, etc.
Thus angel investors are an important ingredient in the success of a startup. Choose them wisely and with proper preparation. A good angel investor will become a stepping stone in your startup’s growth and may also introduce you at later stages to potential venture capitalists.
Author: Saurabh Jain (Follow him on Twitter : @skjsaurabh)
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