How to get angel funding to start a business?

As we know angel funding is the one of the most important source to collect startup money to grow a business for small companies. But the important question is,  how to get angel funding to start a business?.

Many people, these days are excited at the prospect of starting and owning a business. While the excitement is nice and motivating. Most of these people are blocked to start a business of their own because they don’t have the necessary capital to begin with. One popular way to raise the funds for such businesses is Angel investment or Angel funding.

What is Angel funding?

An angel investor is someone who is ready to risk his money in your business with the hope of huge potential return. In exchange for the required capital that he would be investing in your business, he will ask for convertible debt or an equity share of the company.

These angels are successful entrepreneurs and businessmen who, besides the prospect of high potential return on their investment, also want to mentor young entrepreneurs as well as to be at the helm of latest developments in the industry by utilizing the energy and potential of next generation. This is one of the reasons that angels tend to invest in a business or industry they understand and have some prior experience.

Who can be an Angel investor?

To be included in the league of angel investors, you need to meet some legal criteria. One should be an accredited investor as defined by Securities Exchange Commission (SEC). The net worth of an angel investor should at least be $1 million and they must make $200,000 a year or $300,000 a year jointly with their spouse.

How does it differ from Crowdfunding?

Crowd funding, in reference to investment specifically, refers to collecting the needed capital by taking contributions from a large group of people and especially from an online community. Crowd funding is a relatively new trend and also gaining popularity as a way to raise capital for small businesses especially start-ups.

The amount that someone invests through crowdsourcing is more of a token sum, but the combined power of many contributors may still make it a significant amount. While the contributions from a large community may make the amount thus raised significantly, this still cannot be compared to that of received from an angel investor.

With crowdfunding, besides the capital, you get solidarity from a large number of people who believe in your business idea and want to see it succeed. With angel investment, you get much more than capital and passionate support of the investor. You get so many connections, oversights and experiences that come along with your investor.

Raising money through crowdfunding is a faster way to raise capital especially if you don’t need a very large sum of an amount. Angel funding, on the other hand, is a time taking process as the investors take their time in performing their due diligence on your business plan and financial model.

Finally, with angel funding, you have to give away the ownership of your company to the investors as equity shares whereas with crowd funding, you are still the owner of the business and you just share the part of your profit with the “investing crowd”.

How to get Angel Funding?

It should be understood that an investor is not going to put his trust and money in your business in a matter of hours or days. While you are looking for angel investors to invest in your company, at the same time, there are other businesses too that are trying to get the attention of these investors. In this competitive landscape, you must work on increasing your chances to successfully land with an angel investor. You can follow these tips to help you stand apart

Incorporate your business
As it is easier to carve up the equity shares in an incorporated entity, angels prefer to invest in a corporate entity rather than a company with sole proprietorship or partnership. You may choose to go for an S-Corp, a C-Corp or an LLC based on your vision of the company.
Assembling a great team
An investor welcomes the uniqueness of your idea but if you don’t have a competent team, he will not be investing as in his experience he might have seen many great ideas failing, if those ideas were not executed well. Hence, you must have a skilled, capable and motivated team.
Invest your own money initially
Before you expect an investor to provide you the required capital, it is expected of you that you have already put some money of your own in the business. It is ridiculous to think that someone else will put their money in your business if you are not putting any money of your own. See if you can get any additional funding from friends and family.
Build a prototype
Investors want to get associated with a start-up as early as possible yet they are not sure until they see a “proof of concept”. Build a prototype for demonstration before you start contacting investors. This way you can make the investors look at the scalability of your business rather than the core feasibility. Try to fund the capital needed for building the prototype by yourself.
Draft your Business plan
Simply put, an investor does not share your passion or vision about your idea and company. What impresses an investor is a well-laid business plan that you know inside and out? You should be prepared to answer all the different questions which an investor may ask.

What should you highlight in the business plan?

Your business plan is scrutinized very closely by the angel investors. You should highlight these following points in your business plan:

  1. What makes you different
  2. Who are your competitors and do you have any competitive advantage over them?
  3. What is your current market share as well as those of your competitors?

Make sure to provide the source of your data that you have used for different estimates.Never go for any unrealistic data. Present a SWOT analysis of your business plan explain how are you planning to handle the opportunities and threats.

Lay out your Financial Model and Operational plan

This is the area that has the interest of the investors as this is where they get their Return on Investment (RoI).

All the sources of revenue generation which may be product sales, services, licensing or advertisement should be explained in detail and justified. An investor is not an end-user so he might get bored with the technical details, but he will always have all his attention towards financial details.

An investor is always curious to know how you are planning to spend the money and why you cannot spend the money in some other, possibly better, way. You should be prepared for such questions and should be handy with justifications of such questions.

Perform a break-even analysis to calculate the amount of revenue which will cover the initial investment.

Lastly, present the best case, expected and worst case scenarios. Explain how your business will fare if and when there is stress on the business. What will be the exit strategy? It will reflect your thoughtfulness and also add credibility.

Zeroing in on Customers
If you can find a customer who is willing to pay for your product or services when it can be offered, it very much impresses the investors. If you have customers lined up who are testing your product and are committed to buy it if your product solves their real world problem, then you can be assured to find angels to fund your business as this is the ultimate test of the utility of your product. In the real world, the utility of a product brings the revenue and it is from here that investors estimate the revenue growth and validate the pricing strategy.
Manage your time
Angels’ have their due diligence process and it is hard to satisfy all their concerns overnight. You should be prepared for multiple rounds of discussion. These rounds of discussion may involve so many people and this poses a real challenge to your patience and understanding of the system. If you are looking for a significant amount of funding then it may take 3-6 months of time before you get the funding, even longer in an uncertain market. Remember only your passion can keep this going.

Raising capital through angel investment is a task of undaunted courage itself. If you are told that it is not easy to raise capital from angel investors and there is a huge probability that you will get shot down even before you get a chance to do proper presentation, the challenges that lie ahead are not overstated. The good news is that while you are looking for angel investors to invest in your company, at the same time, these angel investors are in the lookout for businesses to invest in.

Conclusion –

You should be flexible with time and approach when you are dealing with angel investors since this essentially is a time-taking and ego-shattering process. Starting and running a business is a very consuming process, raising money for it with angel investors is an even tougher task but with a positive approach is right and realistic goals, it can be done. All the best!

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