If you’re on the hunt for pre-seed or seed funding for your startup, you’ve likely heard the term ‘angel investor’ a few thousand times by now.
But what are angel investors? How do you get one to fall from the sky for you?
Angel investors are crucial for the success of any startup funding ecosystem because they fuel early-stage companies with capital when venture capitalists usually deem these companies too small-fry to bother funding them. Startups with valid, bold concepts but very little traction rely on angel investors with the vision (and madness) to believe in their ventures.
And, clever angels know that if they back a winning horse before it's popular (buying stocks at a low valuation) they stand to make a hell of a lot of cash.
What are Angel Investors?
The term angel investor has its genesis in wealthy individuals who financed broadway shows back in the 1970s. Pretty snazzy, right?
Today, angel investors (or “angels”) remain wealthy individuals- except rather than investing in show tunes, they’re investing in early-stage startups. Replace “Saturday Night Fever” with “10x return” and it’s basically the same thing: the next big hit.
Many angels in the tech space were once working in a tech company like you! They managed to scale the mountain and exit and are now reinvesting and supporting the next flock of startups and founders.
Sometimes angels self-identify as angels and others may not know they’re an angel investor until they’ve made their first investment. This means your powers of persuasion can play a huge role in helping could-be angels find their wings.
Other angel investors already know their fate in the money heavens and are eagerly investing in early stage startups, either as individual investors as part of an established syndicate; what is also referred to as an “angel investor network.”
Syndicates are groups of angels who have banded together to invest in a specific geographic area or industry. These networks can offer significant expertise (and capital) but come with a little more red tape than a private angel investor.
When and How do Angels Invest?
If “pre-seed,” “seed,” “bridging round” and “post-seed” all mean similar things to you, you’re not wrong. These terms are used fluidly and can mean different things to different investors. Which is less than helpful- we know.
That’s why it’s best to think about cheque size rather than naming the round, at the risk of spooking certain investors unnecessarily according to Ed Hooper, Startup Investor and Co-Founder of Startup Galaxy.
Over a startup’s lifecycle, it will likely bring in between one and 20 angel investors, and each might write cheques anywhere from $10k to $1 million.
No matter whether it’s an angel’s first investment or you’re pitching to a seasoned syndicate - getting anyone to part with their money for a seed stage company is no easy feat. But their knowledge, networks and cash can be invaluable when it comes to growing your business quickly.
One great example is Scale Investors, Australia’s first and only angel investor network focused on female entrepreneurs, investing in women led and gender diverse startups at seed and pre-seed stage. Chelsea Newell is the current co-CEO of Scale Investors and says “there’s no linear pathway to raising that first round of capital. Some founders do a seed round, some do a pre-seed round, some do a family and friends round” - proving the theory that labels don’t matter much.
How to Find Angel Investors
As we’ve mentioned, angels are simply wealthy individuals. There’s no one “right” way of finding angels to invest in your business.
Angels often have business or startup experience (possibly as a former founder with cash from an exit) and can therefore act as a trusted advisor as well as a source of capital.
This means, angels can provide more than just money. If you’re selective in your search, you can benefit from their knowledge, experience and contacts, should they invest in your startup. As a starting place, look for people with general business growth know-how – who have worked successfully with companies like yours in the past.
There are plenty of lists of angels you can access, usually curated by investors. If you’re in Australia, try starting with Airtree’s crowd-sourced list of investors.
Experts in their field
This includes former founders with recent exits.
Airtree is one of the country’s leading venture capital firms, they are also a key driver of angel investment growth in Australia via their Airtree Explorer Program which teaches Angel investing.
Mellisa Ran, Head of Community at Airtree says “people who have grown up in the Australian ecosystem who have had had exits, are keen to give back via angel investing,” supporting the notion that the founder-turned-funder flywheel is thriving in Australia, as it is in startup ecosystems around the world.
Depending on where you are located, there will be lists of Angel Syndicates relevant to your location, online. However, it’s never a bad idea to spread your search beyond your geographic location (within reason).While not impossible, it's unlikely an angel in Israel is going to invest in an Australian pre-seed startup but a San Francisco based angel may very well invest in a startup based in New York City - so placing your energy where it’s best served, makes sense.
Chelsea Newall says “previously syndicates were extremely siloed in Australia. There were Sydney Angels, Brisbane Angels, Melbourne Angels, etc. But post-Covid, those divisions have broken down significantly with the help of groups like LaunchVic.”
The takeaway: don’t be afraid to reach out to syndicates that aren’t right in your backyard.
Most founders have an insatiable appetite for connecting with investors on Linkedin and Twitter.
If you’re not already connected to investors on these platforms, it’s a brilliant way to make a “cold call.” As with any cold call, put your best foot forward and write a personalised note to whomever you are adding. A Targeted approach will always be more effective than a scatter-gun one.
Friends and Family
We told you anyone could be an angel investor, remember? Well, that includes your friends and family. Depending on the personalities involved, these can be awkward conversations to have. But as with any angel to whom you pitch, remember that you’re not asking for free money, you’re offering something highly valuable in return- a piece of your company.
If you back yourself with everything you have, your friends and family might just do so as well.
These are just a few of the options for finding angel investors. Be creative, attend networking events, ask for introductions. Above all, be relentless in your pursuit.
How to pitch to Angels
There are a few major dos and don’ts to be aware of when it comes to pitching any investor, including angels.
Cake has a range of resources from a Capital Raising Toolkit which includes a page on preparing to raise and a page on raise hacks.
Don’t outsource the search
Fundraising is time-consuming and difficult but, as the captain of the ship, you’re the most qualified person to do it. Angel investors (like all investors) are investing in you, as much as they’re investing in your startup. If you have someone reach out to investors on your behalf, don’t expect a positive response, if any response at all.
In a similar vein, Chelsea Newall stresses the importance of maintaining personal contact with your angel investors, post-investment. She says it is “just as important as pre-investment communication because you need to be thinking about the next cheque. Angel investors are often there to support for more than one round.”
Do your research
Do your research before you pitch. Look for things like proof of demand for your product, market dynamics or trends that support the valuation you’re proposing. Rather than naming a price and testing the market, which can spook some investors, Ed Hooper suggests founders raise with a clear runway in mind, that can be expressed to potential investors.
He says, “raise for a minimum of 12 months of runway and a maximum of 24 months. Come up with a budget or number of milestones that need to be hit to achieve growth. I love when a founder says to me we need 500k for 18 months of runway and hit milestones A, B and C. I see a forward-thinking journey which makes me want to invest.”
Investors will likely want to see how your business’ revenue will grow over the next few years, and when you plan to exit, so they can see a clear path to returns. Most importantly, ask yourself this: would you invest in your company right now?
If the answer is no, you’re unlikely to secure investment from an angel.
Get your house in order
Angel investors will perform some level of due diligence before they inject capital into your startup. Make sure you’re prepared.
This means having an up to date cap table that includes any options you’ve given to employees via an ESOP.
Often founders can spend all of their time and energy securing the deal and then waste an inordinate amount of time getting the paperwork ready to secure the investment, which can at best be unimpressive in the eyes of a new investor, or worst case - lead to the deal falling through at the 11th hour.
Cake Equity can streamline capital raises, ensuring your house is in order and you’re ready to send offers at the click of a button.
Use Cake today for free. We make equity easy.
This blog is designed and intended to provide general information in summary form on general topics. The material may not apply to all jurisdictions. The contents do not constitute legal, financial or tax advice. The contents is not intended to be a substitute for such advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.