Raising money to start or build a business is one of the toughest challenges you are likely to face as an entrepreneur. Having a great concept is not enough: you also have to persuade banks and other investors that your business has a good chance of succeeding. To a much greater extent than a bank or investment firm, “angel” investors may be willing to take a chance on less conventional business proposals.
What are Angel Investors?
Angel investors are typically successful entrepreneurs or professionals who are looking to invest capital in start-up ventures or growing businesses. They may be retirees who want to remain involved in their field in a less hands-on role. Because many of them have built one or more companies themselves, these investors can have a wealth of experience to offer novice entrepreneurs. In addition to providing financing for a company, many angel investors may act as mentors to management, particularly during the start-up phase.
Some investors belong to groups that operate like funds, but many are independent businesspeople who prefer to invest in companies based in their local area. Even before you reach the stage of needing to raise cash, you should consider networking. In many parts of the country, “social clubs” have been organized to help entrepreneurs and angels find each other. These clubs, which can be industry specific, typically give entrepreneurs the opportunity to make formal presentations before groups of investors, and may also host informal networking events.
Preparing for a Meeting with Potential Investors
Attracting funding from an angel investor is different from applying for a loan. While angel investors, like banks, will want to study your business plan, they may also spend considerable time getting to know you and your partners on a personal, as well as professional, level.
But even after you have impressed potential investors with your character and enthusiasm, most will not pull out their checkbooks unless you can clearly explain your goals for your business, and how you intend to reach them. Before starting your search for investors, spend some time creating a detailed outline of your company that goes beyond the basic business plan.
Angels will want to know all about your company’s product or service, as well as its customers, distribution channels, profit margins, and competitors. Research your market, and be prepared to explain to investors how your company will compete successfully in the prevailing conditions, and over time.
Numbers are essential when making a pitch to an investor. Angels will ask about start-up and development costs, projected revenue streams, projected expenses, and sales forecasts. If possible, provide projections that cover a time span of three years or more. Some investors will be reluctant to get on board unless you are contributing some of your own capital to the venture, and have other sources of funding as well. Investors will likely ask questions about profitability, and how you intend to use the funds you are attempting to raise.
Once you have convinced an angel investor of the viability of your plan, you are ready to start negotiating a deal. However eager you may be to secure funding, resist the temptation to accept an offer that does not meet your needs. Your company might struggle if it is underfunded, and you may end up spending more time raising additional money than actually running your business. Ideally, your angel should be willing to make a substantial commitment to your business, and have the wherewithal to invest more as the business expands.
Exercise caution, as well, in negotiating an equity arrangement with a potential investor. While some angels will be happy to stay in for the long haul, others will come in with a clearly defined exit strategy that assures them a return on their investment if the company reaches a certain level of success. Consider whether this is an arrangement which suits your long-term goals for the business.
It is equally important to clarify from the outset the level of involvement an angel will have in your business. The investor may or may not have a formal role in the organization, or the power to influence major decisions. You may be happy to see your angel in the office every day, or you may just want an advisor you can call upon for occasional guidance or input.
As independent agents, angel investors may be hard to bring down to earth. But if you snag one, you can potentially tap into a valuable source of capital and expertise. Contact us for further assistance.
This article was prepared by Liberty Publishing, Inc.
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