An angel investor is a person who provides ownership equity or convertible debt to a start-up with money. They fund early-stage start-ups with high growth potential and elevated risk. Angels are individuals of high net worth who want to extend their investment horizons by promoting start-ups that demonstrate promise and profitability. Although most angels are licensed, with more and more individuals showing interest in expanding their investment portfolio, the concept has broadened.It is common and advisable for Angel Investors to gravitate towards industries and businesses that they understand and might have prior experience in.
How Does Angel Investing work?
Typically, in debt financing, a start-up borrows money from a creditor, and is repaid in the future with interest. Angel Investing is very different from this. When an Angel Investor funds a start-up, no debt is created, and no money has to be repaid.
In Angel Investing, the investor receives an equity share in the company depending on the capital invested. Most of the time, businesses that receive Angel-funding already have their revenue and cash flow in place. They require funding to kick start their business and take it to the next level.
Looking for angel investors for your startup? Here’s all you need to know
When you are raising funds, you are not only competing for the investors’ money for your company or the companies in your sectors but also competing with companies across sectors. This means your company has to be the most promising in not just its own domain, but it has to be the best across other business plans and ventures too. It is therefore absolutely critical to be well prepared.
High-quality angel investors will not expect dividends year on year. They would want all the cash that is created or generated by the company to be ploughed back into the company for growth.
On appropriate preparation before seeking investment, a thoroughly thought through process and understanding of the business model is needed before approaching any investors.
What is important is the product, or a proposition, or some sort of an endorsement of the product. Understanding the different lines of revenue which the company will build over a period of time is necessary. Also, it is equally important to know where the entrepreneur is going to spend money.
Tips and ideas on what angel investors look for in early-stage startups.
It is not that investor need a Balance Sheet or a P&l at this stage. But what they do need very clearly are the cash rules, very important when you begin to raise money.
The difference between revenue and expense is called burn, which means that you’re burning more money than you’re receiving, and therefore, you need to raise money.”
Some other points that first-time entrepreneurs need to be looked at are –
Understanding the market – Study the market to be aware of the other players who are trying to bridge the same gaps.
Customer acquisition strategy – Why will customers buy your product/solution? Find what sets you apart from the competition right from the beginning.
Price strategy – If the product is great but the pricing is high, or if there are similar products in the market that is more affordable, then customers will prefer the latter.
Product delivery – The process of delivering the product/solution to the customer in the most efficient manner – taking supply chain and timelines into consideration.
Team – Investors look for startups that have a strong team put together, and makes sure the members complement each other with different skill sets.
Company expenses – Having a clear understanding of company expenses and revenue is important. It is best not to dilute more fund into startups than is required.
For a complete investment memorandum, and clearer financial models, it is imperative to have all the revenue-related information in place. Building investor pipeline for the company is another important parameter. It is very important to be aware of the people who have invested in the space and all the other details pertaining to the investment like – the company they have invested in, the amount they have they been able to invest, etc.
It’s very important to have parameters against which you are building your investor information as well.
After all the initial prep, once a startup gets called to present their pitch in front of the investors, it is important that the pitch is very well-rehearsed, and the deck is extremely sharp.
And finally, if a startup gets shortlisted, the next stage calls for some deep-dive due diligence. In this next stage, investors want to see the sales pipeline, they want to understand the entire startup and its product in full detail.
Besides investing, angel investors also add value to a startup, and leverage his or her domain expertise to bring more money from other investors to the table.
At Motiva8, depending on the domain, we would recommend a lead investor who has either built businesses in that space or understands that space. He or she will not be able to invest the entire cheque, but can bring in more investors who can pump more money into the startup.