Raising Money from Angel Investors

By Michael Slater     Add your comments

It’s important for entrepreneurs seeking angel investments to understand the different types of angel investors, the nature of angel investment groups, and what it takes to approach them successfully.

Angel investors are, for many startups, an important source of early capital. Angels are typically high-net-worth individuals, often entrepreneurs themselves, who invest in young companies. It’s important for entrepreneurs seeking angel investments to understand the different types of angel investors, the nature of angel investment groups, and what it takes to approach them successfully.

Types of Angel Investors

Some angel investors act on their own, while others participate in angel investment groups. The dynamics of working with each type are quite different. Some of the most prominent angel investors are people who have been very successful entrepreneurs and have a lot of funds at their disposal. Such individuals sometimes invest hundreds of thousands of dollars in a single company. They are very difficult to approach, however, if you don’t have a personal introduction. These people are flooded with requests and, like venture capitalists, the first filter they often apply is “did I hear about this opportunity from someone that I trust?” So to reach these people, your best bet is to work your personal network to find an introduction. If you can’t get an introduction, it is probably a waste of your time to try approaching them cold. Angel investment groups are different. Many groups have 50 to 100 members. Typical members are not as wealthy as the big-name angel investors, and the average investment amount is smaller. It is common for individuals in these groups to invest $25,000 to $50,000 in a company, while $100,000 to $250,000 investments are possible, but rare. Often, however, if you get interest from such a group, you can get half a dozen investors. The total investment from a group typically ranges from about $250,000 to $750,000. There are other distinctions among angel investors that are worth keeping in mind. Some are interested strictly in return-on-investment, don’t want to get deeply involved with the companies in which they invest, and are willing to invest in many different types of companies. Others are more active investors; they typically are motivated in part by their desire to add value to the companies in which they invest beyond their capital, and they typically focus on the types of companies with which they have experience.

What Does it Take to Get Funded by Angels?

Angel investors typically invest at earlier stages than venture capital firms, and they often do not require that you have a billion-dollar exit goal. They are, however, focused on high-growth companies, and you’ll need to be able to paint a credible picture for them to receive a 10X return within four to six years. Before you approach angel investors, be sure that your business won’t be perceived as a “lifestyle” business. The vast majority of small businesses are lifestyle businesses, which means that they can produce a good living for the owner and employees, and may appreciate somewhat in value, but don’t have the potential for high growth that is necessary to attract investment. If you are at the idea stage and have not yet developed your product, you are unlikely to have any success with angel groups. You may find individual angels to invest, especially if you have a relationship with them or a highly regarded introduction, but you’re more likely to need to find “friends and family” investors to get your product at least to a prototype stage. Most Internet companies do not require large amounts of capital to launch, and investors often want to see that you have been able to get the product on to the market, and demonstrate customer acceptance, before they will invest. There are some individual angel investors who like to get involved with early-stage companies, but most angel groups will be resistant to companies that do not have any demonstration of traction with customers.

Working with Angel Groups

Angel groups are easier to approach than individual investors because they have a defined process for evaluating submissions. You’re still much better off if you have a personal introduction to one of the members, but it is less important than when working with individual angels. The process for most angel groups is something like this:

  1. Submit an executive summary via their web site. Groups in areas such as Silicon Valley often get 50 or 60 submissions each month, so you need to be sure that your executive summary is very strong.
  2. If your submission makes it past the first filter, participate in a phone screening by one of the members. Probably less than half of the submissions make it to this stage.
  3. Typically 5 or 6 of the submissions are chosen to be evaluated by the selection committee. In some groups, the selection committee meets on their own, without the entrepreneurs present. In others, the entrepreneurs attend. In the latter case, there may be just an informal discussion without slides (as with the Band of Angels), a shortened version of your presentation (as with the Sand Hill Angels), or a full presentation (as with the North Bay Angels).
  4. The selection committee chooses 2 or 3 of the submissions to present at the full group meeting, which is typically during dinner and may occur every month or every two months.
  5. You present at the dinner meeting, after which individuals who are interested sign up for a follow-up meeting.
  6. At the follow-up meeting, you go into more detail on your plans and address questions. If you make it through this process and have actively interested investors, then generally you need one of them to step up and act as the lead investor and work with you to negotiate the term sheet. Often, the group will divide the due diligence task among the interested members, so you don’t have to deal with redundant due diligence inquiries from each of them.

For a few tips on preparation, see our article on preparing for an investor presentation.


Many groups, such as the North Bay Angels and Band of Angels, do not charge the entrepreneurs for their participation. Some charge a nominal fee (such as $25 or $50) for applying, in large part to keep down the frivolous applications. In some cases, if you are invited to present at the main meeting, you will have to pay another fee to do so. The Sacramento Angels, for example, charge $200 to cover the cost of the dinner for two company representatives. In some cases, the fee is much higher; the Keiretsu Forum charges a $6,000 fee to present to their four San Francisco area groups.

Investment Forms

In most cases, the members of the group each invest as individuals. The members coordinate their efforts, but the group has no formal role in the investment. You’ll have to work individually with each investor to get them committed and get the papers signed. A few groups, such as the Sand Hill Angels, form an LLC for each investment. The LLC then becomes the investor in your company. In some cases, the group may have an organized fund. For example, the Band of Angels also has an investment fund, whose capital comes from institutional investors, that can take the role as lead investor, while individual members invest separately. In most cases, angel investors expect to be purchasing preferred stock. In rare cases, they may accept common stock. Many entrepreneurs like the idea of offering convertible debt. This is a useful approach when the goal of the investment is to provide a bridge to a preferred stock financing, which is expected to occur in the near future. It is much less expensive and time consuming from a legal perspective, and it avoids the need to set a value on the company. Many investors, however, dislike convertible debt, primarily because they don’t know at what price their stock will eventually be issued. The terms typically give them a discount on the next financing round, perhaps 20% to 30%, but if the company doubles in value between when the convertible debt is raised and when the equity round occurs, this isn’t a good deal for those early investors. Individuals who really believe in your company should be willing to consider convertible debt under the right circumstances, but you’re likely to find a lot of resistance from angel investor groups.

Finding Angel Investors

If you’re looking for individual angel investors, the best approach is to work your personal network and seek introductions. You can also look at similar companies that have angel investors and try to contact those people, but this is a tough road. To find angel investment groups, there are two great resources:

  • Angelsoft is a web service that many angel investment groups are now using. You can search for groups by location, and you can easily submit to multiple groups through this site.
  • The Angel Capital Association offers a directory of angel investment groups.

Some groups consider companies regardless of location, but you’re likely to have the best luck with groups that are within an hour or two’s drive of your location.

Author: Michael Slater is co-founder of Webvanta, the technology that drives Spartina.com

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