There are roughly 268,100 active individual angel investors in the United States. If you want to go the route of tapping an angel network — a group made up of up to 150 individual investors who pool their finances and share the due diligence work — there are more than 300 of those. In short, there are lots to choose from and they’re ready to invest. Your challenge is finding the right angel investor for you and your business and then making a great presentation to capture their imagination and desire to invest in you and your company or vision.
What a lot of founders don’t realize is that not all angels invest for the same reasons. Backing a startup is a bit like shopping for a car: Do you want a sports car that does zero to 60 in four seconds? A dependable sedan? A Prius that appeals to your environmentally friendly side? Keep in mind that monetary gain may be a secondary reason for some investors.
Here are three of the most common types of angel investors and what motivates them:
- Hedonistic angel investors are attracted to what they perceive as exciting ventures, seeking the thrill that comes with risk and innovation.
- Angel investors looking for a significant ROI seek companies that have the likelihood to be bought out by a large corporation or the ultimate prize of going public.
- Altruistic angel investors are motivated by a desire to support new companies and entrepreneurs, community development, and job growth.
Start by researching the backgrounds of individual investors to identify their motivation. Once you know what they’re looking for, here are five more things you should take into account before you pitch:
- The investor’s experience. Most angel investors are not only looking to provide their money, but their insight and guidance as well. You can bank on the fact that they will probably want to be involved with your company should they decide to fund it, and thus selecting an investor with market-specific experience makes it easier to speak the same language.
- Geographic location. Investors in close proximity to your business are more likely to invest because it makes counsel easier. It is not a coincidence that in venture capital, most VCs are in New York, Texas, and California because they’re close to the action. Investors like to grow where they’re planted. Boston, Washington DC. Cincinnati and Kansas City and Austin are also becoming hotbeds for angel and investor funding.
- Rate of return. Does your projected rate of return meet their objectives? Does your company have the potential to pass their investment criteria? Each investor has different requirements. Do NOT underestimate the importance of this for investors.
- The needs of the market. Investors always evaluate the market’s needs and consider whether your product or service will carve a niche for itself. Can you demonstrate vast growth potential, uniqueness, and an unfair competitive advantage? An investor is looking to see if you’ve done the research to show that you can make it happen.
- Their investment portfolio. Investors have a comfort zone. Investors’ past actions guide their future decisions, so the most likely fit will be with someone who has previously invested in opportunities similar to yours. Even within the technology sector, some investors prefer to see innovative applications of existing technologies as opposed to brand-new technologies.
Have you received angel funding recently? What tips can you add?
Industry sectors will matter a lot, with some seeing tremendous growth and others not so much. Sector “verticalization,”is coming into its own. Some angels are seeing situations where accelerators, angel groups, and platforms are specializing in specific sectors such as hardware, education technology or green technologies.
More people in their 30s and 40s are becoming angel investors. Women are about 20 percent of all angel investors today, and that percentage is slowly but steadily moving up. This is creating a great opportunity as it is generating more capital and mentorship for female-led startups. Don’t underestimate these two growing and passionate segments.
In this rapidly evolving ecosystem it’s more important than ever to connect with other angels to learn and refine your investing approaches for continued success.
Places to find more information on Angel Investing:
Rich Russakoff provides speaking presentations, one-on-one coaching, and workshops on how to create a sensational presentation to acquire funding. Contact him for more information.