Everything entrepreneurs need to know about angel investors

Are you ready to take your brilliant idea to the surface and launch that business you’ve been dreaming of? Funding is a big part needed for take-off. If you’re researching options you may have come across ‘angel investors’ and thought to yourself “what is an angel investor?” You’ve come to the right place for a crash course on angel investors, what they are, how to find them, and how to write a funding request letter. Are you ready?

What is an angel investor?

The angel investor is essentially the fairy godmother of the start-up world. Picture someone with the time, money, and interest in helping burgeoning businesses. These are people who would rather see brand new, ingenious ideas turn into profitable businesses, so they give these start-ups early-stage or 'seed' money to make that happen.

But angel investors provide start-ups with more than just a source of funding. Angel investors can provide valuable management advice and important contacts. Angel investors usually spend years as venture capitalists building a network of business and industry contacts. They typically have prior experience in directing companies and can help guide you through the challenges of starting and running a company.

For this, angel investors get a piece of your business. In exchange for the money and mentoring the angel investor provides, you give them equity, so they get a percentage of your company. They're betting that your business will be successful, so as a partial owner, their slice of your business pie will be worth more down the road.

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The pros and cons of angel investors

Angel investors can be a fantastic resource for start-ups needing capital, expertise, and connections. Yet not every business is suited for an angel investment. Weighing the benefits against the potential downsides is essential. Take a look at the pros and cons below:

Pros of Having an Angel Investor

• Financial support
  When conventional lenders may not be willing to take risks in the early stages, angel investors offer the required funds to take your business off the ground. They may also have innovative ideas around structuring the funding that will provide the capital you need now along with, say, a credit line for future needs. 
   
• More than funding
  Angel investors are not just wealthy individuals, many of them have been right where you are now. They may be able to provide priceless advice, direct industry networking, and an unwavering tutorship in addition to helping you maneuver the turbulent ways of establishing and boosting your company.
   
• Flexibility
  By far, negotiating with an angel investor deviates from other financing counterparts. There are far more opportunities to negotiate toward an agreement that’s optimized for both parties.
   
• Vote of confidence
  Having an angel investor back your business can be a big thumbs up, potentially attracting more investment and interest down the line.

Cons of Angel Investors

• Giving up equity
  You'll probably have to sacrifice a portion of your firm's ownership to obtain that angel investment. You will have to allocate future profits and might lose some control over your own company.
   
• Pressure to perform
  As dedicated as they may be to helping your business succeed, an angel investor is not there for charity but to make money. The pressure to start quickly and take the business to profitability is put on you. The growth expectations may not align with your vision or pace for your business.
   
• Potential for conflict
  If your angel investor advises you to run your business differently than you had planned, there may be considerable disagreement. From the start, you must ensure everything is in sync with you and your possible investor.
   
• Not a blank check
  Angel investors provide capital, but it's not unlimited. They invest what they're comfortable with, which might only cover some of your needs, especially as your business grows.

In a nutshell, angel investors can be a fantastic resource for start-ups needing capital, expertise, and connections. Like any relationship, finding the right angel investor is about compatibility, shared vision, and clear communication.

📢 Related: Small business financing: Top 5 alternative options for funding

How to find angel investors

Finding angel investors is like networking to find that one friend who's always up for an adventure—except this adventure involves funding your business dreams. Look at the ideas below where you might bump into these financial adventurers:

Networking events

Essentially, they're like parties, except at these events, everyone's talking about business instead of sports or current events. And everyone at these parties has money… well, at least by start-up standards. Many angel investors attend industry conferences, seminars, and local business events. Dress well, have your business cards handy, and get ready to impress.

Angel investor networks

An angel investment network is like a club for angels who prefer to invest jointly. They often work together on deals and then split the returns. A quick search online will help you find some in your area or within your industry. It's a bit like online dating; you may have to meet a few people before you find 'the one.'

Angel investor online platforms

Websites like AngelList or Gust are the Tinder for entrepreneurs and angel investors. Enter details about your start-up, swipe through investor profile summaries, and see who's interested in a business date.

Incubators and accelerators

Much like boot camps for entrepreneurs, these programs help start-ups with mentoring, resources, and sometimes investment (generally from angel investors). They are very tough to get into; however, being admitted into an incubator or accelerator significantly enhances your credibility and network. The International Business Innovation Association is one; learn more about it here.

Social media and forums

LinkedIn has transformed a bit in recent years, and though most use it as a job-hunting tool, you can also take a risk, share your start-up story, and engage with investor content. You never know who's looking; your social actions can lead to potential DMs from interested angel investors.

Friends and family

Ask your entrepreneurial friends, mentors, or even family if they know someone. A personal intro can sometimes open doors that cold calls or emails can't.

Remember, finding the right angel investor is about more than just money. It's also about finding someone who believes in your vision and can offer valuable advice and connections. Take your time, research, and don't fear pitching your heart out. Good luck!

📢 Related: A 7-point checklist for a successful business partnership

How to write a funding request letter

Once you’ve identified an angel investor you want to approach with your business idea, it’s time to write the funding request letter. The funding request letter should be written professionally, engaging the reader and clearly stating the request for funding.

First, introduce yourself and your business by finding common interests with the investor and make that connection. Then, give a brief overview of your business that gets the investor's attention, what problem you are solving, who your targets are, and what your unique solution is.

Next, talk about the market opportunity you've identified and the market problems your company will solve. Provide an overview of your business model, the current stage your company is in, and any traction you have gained. Clearly state how much money you are seeking, what you plan to use it on, and even break this investment down to how much will go to research, product production, supplies, etc.

Share your vision for the future of your business. Talk about what you hope to accomplish in the next few years and how the angel investor's financial support will help you achieve those goals. Thank the angel investor for his or her time and invite them to continue the conversation in a follow-up meeting or call. Be professional, but also let your passion and personality show through. Angel investors invest in people as much as they do in ideas, and they want to know who you are and what drives you just as much as, if not more, than your numbers and facts.

📌 If you’re looking for funding request templates to use to help you save time writing your letter, you can find some here. Finmark has taken some of the guesswork out and offers guidance on letter structure.

💡✍ When you find the right fit, an angel investor can give your business the wings needed to make your goals soar. Be sure you’re soaring with a safety net by protecting your business with the right insurance.

👉 Get a quote today.