Funding 101: Prep


Business Angels

You will quickly find that there are certain types of deals that buiness angels like to fund. It’s not to say there is a hard and fast rule that if you meet (or don’t meet) these criteria your investment fate is sealed, but it’s helpful to know the general parameters by which most angel investors make decisions.

They Like Local Deals

Business Angels tend to invest in their neighborhood first, all other things being equal. That’s not to say they won’t consider deals that are further away, it just means that like anyone else, they would prefer to get involved with business that they can connect with personally.

Early stage startup companies go through a tremendous amount of iteration and changes in their careers, so having someone that is standing next to you during these turbulent times is always a bonus. Angel investors know the perils of a startup because many of them have gone through it themselves.

They Like Industries They Understand

As successful business people themselves, angel investors tend to have deep domain expertise in particular markets. That doesn’t mean they don’t stray from their past and invest in companies that are outside their core domain expertise, but it usually helps if you can find something that they are familiar with.

In many cases finding an angel investor with significant industry experience can help you in more ways than just the capital they may invest. They may be able to help you make key business connections or provide insight into what they’ve learned from your industry. Beyond that, they will provide some powerful credibility to future investors when they see that someone from your industry has backed you.

They Want to be in your Deal Early

Long before you pitch to larger venture capital firms, angel investors like to be the early stage seed money that gets your company started. They are usually looking for deals where they can invest up to $500,000 although an individual angel investor will rarely put in that large of a chunk of money at once.

Regardless of the check size, they look to get an early stake in the company so that they can increase the value of their stock in successive funding rounds. Part of the allure of your deal is the fact that they are getting stock “cheap” by comparison to what it will cost when the company grows quickly from here. Later on as you start to grow and become sizeable, the appeal of an angel investor starts to wane and their opportunity to get into your deal goes with it.

They Need to Like You Personally

Angel investing is all about personal relationships. How an angel investor feels about you as a person and how well you get along is one of the single most important factors in making a decision. Of course angels want to invest in good companies and make good returns, but it’s highly unlikely that an angel will invest in an entrepreneur they don’t like personally just because the deal is so interesting.

That’s why it’s very important to develop a rapport with the angel early on, even before you are officially pitching them for money. You can’t fast forward this process, so the earlier you start the better off you are.

They Want to See Traction

Another incentive for establishing the relationship with your business angel investors will find attractive is watching you develop momentum. It’s easy for someone to say “I’ve got a great idea” but the entrepreneurs investors love to fund come back a week later and say “… and here’s what I’ve gotten accomplished since last week!”

Angel investors know the most valuable asset of an investment is the momentum. Some angel investors will write checks purely based on the current momentum of the company, realizing that there is a ton of work to do in the future to make it a viable investment.

The traction or momentum that you demonstrate to an angel investor can be in the form of finding some early customers, signing a key employee (who is probably working for equity) or getting some early press about you or your concept. All of these are firm indicators that your business is moving forward, and all of these will help you communicate your traction.