Ask Us How: Angel Investors

Posted by Michael Derin

Published on October 16, 2013 under NSW Business Chamber Partnership

Angel investors are wealthy individuals or families who invest in start-ups or high growth businesses.

They are often very private in their dealings and have stringent investment criteria and high expectations of the businesses they invest in, so they expect a certain level of information available to establish whether it is an opportunity worth investing in and don’t make their decisions lightly.

They are often experienced business people or serial entrepreneurs and semi-retired who will have usually done this before.  They provide capital usually in exchange for convertible equity in the business and look to be involved in the business, at least at a strategic level.

When you ask how much they normally invest, well it does depend on how much money the investor has to invest, it could be anywhere between a couple of hundred thousand too $10M or more.

WHAT MAKES ANGEL INVESTORS INVEST

Angel Investors are strategic so will look at emerging opportunities, e.g. technology.

Often they will stay in the industry they are strongest in and familiar with that have good growth plans.

They are generally not passive investors but may not be that active. It depends. They will look for ways they can add value over and above capital.

The bottom line is Angel investors are investing their money to make more money, however when they do invest they want to look at other things such as: 

•              wanting to keep abreast of current developments in a particular business arena

•              mentoring another generation of entrepreneurs

•              making use of their experience and networks on a less-than-full-time basis

Thus, in addition to funds, angel investors can often provide valuable management advice and important contacts.

HOW TO FIND ANGEL INVESTORS

It is fair to say that it is not easy to attract angel investment monies. 

They tend to meet angel investors in several ways, including

  • referrals from the investors' trusted sources
  • Their accountants and/or advisor
  • Their own personal corporate advisors
  • at investor conferences; and
  • at meetings organized by groups of angels where companies pitch directly to investor in face-to-face meetings.

HOW TO MEET AN ANGEL INVESTOR TO DISCUSS YOUR BUSINESS

Know their criteria before approaching them, often they are getting hounded all the time to invest and therefore you do not want to waste their time.

They are looking at property investments; they are looking at public company deals through their share brokers, investing in IPO’s, lower risk investments.

They do have a smaller portion of their funds to invest in smaller companies, sometimes they like to be involved it depends on how wealthy they are and how much their investment is.

Angel investment money by building a strong business case, targeting it to a particular angel investor, identifying exactly what you need. 

You do that through a business plan in place in a space that they are familiar with that has a solid return for them.

Answer the question of what return are they making out of their money, what you are able to deliver for their money, concisely and efficiently.

Often it may be with the corporate advisor first.

1 page summary investment plan as an initial enticer so that you can actually get in front of them, then you have the detailed plan behind them.

It is not too dissimilar to what you would do with a private equity firm or any investor. 

WHAT TO MENTION IN FIRST MEETING WITH AN ANGEL INVESTOR

Generally speaking there are traditional questions that an Angel Investor will ask that cover off on all the aspects of your business.  They want to know what they are putting their money into and how it is intended to be spent.

As a minimum you want to have in place a:

  • A strong business case
  • Documented business plan
  • Strong financial controls and management reporting systems

On the other side of things you also want to be prepared for the questions they would ask you, some of which may include:

  1. What’s the barrier to entry for competition?
  2. What’s going to stop your larger competitors in your space copying you?
  3. What are specific plans for spending their money?  How far does that money get you?
  4. Do you have any customers? Have you spoken to potential customers?
  5. What’s your sales and marketing strategy?
  6. What’s the team look like? Is it impressive and trust worthy?
  7. What is there Return on Investment?

Although there are common questions you’ll get from angel investors, what’s more fascinating is that each investor will ask different questions. So long as you have the foundations right being your business case, business plan and financials you should be able to answer the questions that would be fired at you.

HOW TO BUILD A SOLID FINANCIAL PLAN TO ATTRACT CAPITAL

Your ultimate goal in attracting capital is that you want to create a happy medium.  It’s important that you do not give too much of your business away but at the same time you make it attractive for the angel investor.

I strongly recommend that you get your accountant or advisor to support you in developing the right financial model.

Businesses who are looking to gain angel funds to build a solid financial plan should look at:

  • Ensuring there is a realistic return for the angel investor
  • Business Assumptions
  • Assumptions substantiate the investment return
  • Having the right marketing expenditure to achieve the sales you are talking about
  • Having realistic sales targets in the first place that are not ridiculously high and unachievable
  • Putting in place a 3 year plan that allows for growth throughout the term
  • Building a plan that makes sense
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