Angel Investors
An angel investor is an individual who provides seed capital for start-ups, typically in exchange for ownership equity in the company or convertible debt. They may be friends and family of the founders, accredited investors, or simply someone who believes in the project.
Angel investors oftentimes bring mentorship, experience and access to networks of customers or investors, which makes them a valuable addition to the start-up and its future. Some angel investors will want to actively participate in the development of the start-up. Indeed, it is not uncommon for investors to ask for a place on the Board of Directors in return for their investment. They will usually also ask for a 10% to 30% equity stake in the company in return for their investment. It is therefore of the utmost importance to find an investor who shares the same values and long-term goals for the company as the founders.
Given the high financial risk involved, angel investors usually limit their investment in startups to a small percentage of their portfolios: an average of 7% for less experienced investors, and 15% for more experienced investors. Frequently, their investments will be done through an LLC, a trust, or an investment fund, for liability and tax purposes.
Investors can become “accredited” if they have over $1 million in investment capital, or over $250,000 in annual income.
How Much Do Angel Investors Invest?
This will depend on the experience of the angel investor, and the stage at which the start-up finds itself. On average, they will invest between $25,000 and $100,000.
Where to Find Angel Investors?
Angel investors can be found through angel networks or by directly networking with entrepreneurs. There are databases and directories listing members of investor associations, such as AngelList, EquityNet or WeFunder. There are also networks that are industry-specific and state-specific: we encourage you to research these in detail to find the best fit for your company.
How to Impress Angel Investors?
Professional angel investors will want to make sure the start-up has a promising business plan and a solid exit strategy, like an acquisition opportunity or a willingness to participate in an initial public offering (IPO).
Other draw factors include a competitive advantage over other companies (intellectual property ownership, first-mover advantage), a disruptive product, a growing target market, a strong team with talent, industry expertise, drive and business acumen, as well as the potential to grow quickly without exorbitant costs, which is called scalability potential.
Concentrate on finding investors who are likely to be interested in your company’s idea and purpose. This will allow you to fine tune your business pitch and communications to the investor in question.
Crowdfunding
Crowdfunding, as the name implies, is when a business venture is financed by raising modest sums of money from a large number of individuals. It is usually powered by social media and crowdfunding websites, such as Kickstarter or Indiegogo.
Types of Crowdfunding
Equity Crowdfunding: new shares of the company will be issued and offered to investors in exchange for funding. This method is ideal for start-ups looking to raise large sums of money, but also implies that investors will be committed and potentially active in the company’s development. Some platforms specialize in equity crowdfunding, such as StartEngine and SeedInvest.
Reward-based Crowdfunding: investors contribute capital to the company in exchange for rewards, such as early access to the product, special merchandise or limited editions.
Donation-based Crowdfunding: individuals contribute capital without the expectation of financial return or an award. This is usually used for charitable projects or emergencies. The most famous website specializing in this kind of crowdfunding is GoFundMe.
Peer-to-Peer (P2P) Lending: start-ups can get loans from individual investors through online platforms, usually at more favorable rates than at banks. The P2P lending method bypasses the need for extensive credit history and can offer more flexible terms. LendingClub and Prosper are two popular P2P lending platforms.
Loans
Another funding alternative for a start-up could be to secure a small business loan from a bank.
Debt Financing
Debt financing is when one takes out a loan and promises to pay it back with interest. This is the process we use when buying a house or using a credit card.
The advantages of debt financing is that the lender has no say in the development of your business, and the interest you pay on your loan is tax-deductible. Nonetheless, start-ups rarely even generate a profit when they start out. The last thing such a company may need is to be liable to repayments of debt with interest.
Small businesses usually elect SBA 7(a) loans, the Small Business Administration’s primary business loan program for financial assistance to small businesses, as they have good interest rates and long repayment terms. Most SBA 7(a) loans are repaid with monthly payment of principal and interest from the cash flow of the business, and are mainly awarded to businesses in the manufacturing, wholesale or professional services industries.
Equity financing, as opposed to debt financing, is better suited to companies that need large-scale investments to get off the ground, as opposed to businesses that are only looking to operate in a local market.
Venture Capital
In essence, venture capitalism is an investment tool whereby VC’s enter partnerships with pension funds, high-network individuals, endowments, and foundations, and pool the money to invest in a portfolio of promising and burgeoning companies. This is particularly true of companies with the potential to disrupt existing products or services. VC funding is usually funnelled into the infrastructure needed to grow the business, such as manufacturing, marketing and sales, as opposed to research and development.
Venture capital (VC) funding tends to make an appearance at the later stages of funding, when the start-up has begun to commercialize its product and already proven that it is able to generate a profit. If a VC is convinced by your pitch deck and business plan, it will conduct due diligence into the company and present you with a term sheet outlining the amount it is willing to invest, the equity in the stake it expects or the future claim in the equity, as well as other conditions. A VC will typically aim to follow the start-up long-term, until an M&A or IPO that provides liquidity for all the shareholders.Need help figuring out the right funding path for your business, or preparing your company to attract investors? Our team is here to guide you.
