The following answers are provided by the Young Entrepreneur Council (YEC), an invite-only organization comprised of the world's most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.
As much as you'd like to bootstrap forever, odds are there will come a time where outside funding becomes necessary. Getting to this point, albeit a good issue, is still an issue. How much and when do you raise? From who? Do you stay local? How do you get your ideal investor to listen?
Fear not, for we've reached out to our friends at the YEC to share their top eleven considerations prior to selecting an angel investor.
11 Things You Need to Know Before Choosing An Angel Investor
1. Be Prepared
Be prepared to give a lot more away and get a lot less in return than what the headlines might lead you to believe. To determine your target capital number, assume that you will need more than what you think is the bare minimum, but less than what you would ideally want. Then, paint a clear path to returns for your investors, and syndicate the deal out to a handful of angels to ensure that you're getting the best deal possible.
2. Raise Low and Sell High
Take smaller chunks of money up front, and immediately get to work building a product. Keep raising money on your progress. Don't worry about what the round is called (multiple seed rounds are becoming a standard). Raise what you need to get to your next milestone. Then, get off the fundraising trail and back in the office. You'll earn a higher valuation later.
3. Get Industry-Specific
One of the benefits of investment, beyond capital, is the expertise of the investors to help move your business forward. In particular, angel investors often have deep industry experience, as well as connections that you can leverage for the business. I highly recommend seeking out any executive-level professionals in the space who will bring more than just a check to the table in an angel deal, whether your startup targets market research, professional sports, Fortune 500s, the beauty industry, etc.
4. Build a Relationship First
Don't wait until you're raising capital to start building relationships with potential angels. The best ones are looking for “lines, not dots” as well. And no matter how much you're asking, the better known they are, the more deals they're seeing.
5. Examine Angel Backers of Related Businesses
Entrepreneurs often focus on identifying local angels. A better strategy is to create a list of several dozen successful companies that are somewhat similar to your own business. Then, figure out who the early investors were. Those angels will understand the market, have expertise and experiences to offer you and will be more likely to appreciate the product or service you are trying to build.
6. Focus on Introductions
Where and how you meet an angel investor has a direct impact on the likelihood he will invest in your business. Make sure your angel introductions are from an individual who the angel knows, trusts and respects. The more intimate knowledge the introducer has of your startup, the better the introduction will be.
7. Don't Limit Your Geographical Range
There is a growing class of sophisticated, experienced angel investors across the country (and the world). Today, you are just as likely to find the perfect angel investor in Little Rock or Omaha as you are in Silicon Valley or Boston. Platforms like AngelList and FundersClub
8. Don't Rely on Investors
The best way to get an investor excited about your business is not to need one in the first place. First, build a solid product, then gather as much traction as possible.
9. Consider Other Options
Understand that there are a few ways to fund your business, and equity funding is one of the more expensive forms of money. Many young founders believe that angel investors are the only way to go; it’s popularized in the startup world and sounds sexy to have. In reality, most angel-funded amounts are so small that alternatives such as traditional loans, credit cards or even money (or favorable terms) from potential customers or vendors are all viable options.
10. Minimize the Risk
From an angel investor's perspective, I'm looking for an investment which will return my money and provide me with a handsome return in the shortest amount of time possible. The decision about whether or not I invest (and what percentage of the company I want) comes down to how much risk I believe I'm taking by investing in your business. The best investments happen when you minimize my risk. You can do this by demonstrating real data (sales numbers, conversion rates, customer value, return rates, cost of acquisition, etc.). Knowing what's working and what's not speaks volumes to the angels.
– Charles Gaudet, Predictable Profits
11. Make Sure You're an Expert
Angels are a dime a dozen these days, so when you do meet them, you really need to wow them. I can't remember how many times I've seen companies pitch angels and completely botch it during the Q&A because they only memorized their presentation and nothing else. If you're so “passionate” about your company and industry, you better be able to name off the top people, companies and competitors for them.