If you’re a small business owner who could use some funds sent from heaven above, this blog post is for you. Sort of. Angel investors may not be heaven-sent, but they could be your key to securing some serious cash (and useful advice!) for your small business.
Remember last week when we talked about ways to finance your small business without giving up a smidge of ownership? Yeah, this post isn’t anything like that one. If you’re fiercely independent, though, don’t go just yet!
Partnering with an angel investor holds plenty of potential benefits for early-stage business owners that may just make the whole thing worth it for you. Join us as we explore the pros and cons of this financing path, and where to find these angels!
What is Angel Investing?
If financing your small business is an Oreo, angel investors are that sweet icing in the middle: They fill the gap between early financing from family and friends and that later-stage financing from venture capitalists.
Angel investors aren’t usually full-time investors. They’re often doctors, lawyers, or fellow business owners who want to help a new company reach its potential (and hopefully make good money along the way.)
Though they aren’t full-time, angels are usually accredited investors, defined by the SEC (U.S. Security and Exchange Commission) as having had a $200,000 income for the past two years ($300,000 for joint-filers), or a net worth of more than $1,000,000 in investable assets.
And there are limits to an angel’s generosity: they can only invest 5% per year of the lesser of their income or net worth. If you’re relying on crowdfunding? You can accept $1,000,000 per year.
Angel investors can be a godsend for companies that are seeking funding and guidance, but they aren’t a good fit for every small business. Let’s dig into the details!
Pros and Cons of Angel Investors
- You’re off the hook…well, sort of. If your business does well, you’ll need to honor the equity deals you’ve agreed to. If it goes belly-up, though, you aren’t required to pay your angel back. Considering the scary truth that 70% of small businesses head south within 10 years of opening, this is a good thing.
- You’ll have less paperwork. If you raise financing through angels, you won’t have to complete any investment filings with state regulators or the SEC.
- Angels provide cash and knowledge. Especially if you’ve got a startup, the business experience brought by an angel can be invaluable to your new company. Your angel investor can help grow your business through management and mentorship, and will have plenty of motivation to do it well since they won’t make any money until you do!
- There may be extra money! Angel investors typically pump more cash into a company than their initial investment. Your angels should understand that starting a company is a marathon, not a sprint! If they’re seeking high returns, they’ll need to be ready with water bottles at mile 10. (Poor metaphor, but you know what we mean!)
- You get an uber-passionate new team member. High risk can either equal high reward or massive failure. If your angel knows what they’re doing (they should), they’ll be prepared for either. Because of that, angels are typically going to invest in products they’re passionate about. Partnering with early-stage companies and assisting in their development is often a fulfilling experience for angel investors.
- You won’t retain complete control. This is really the only con, but it’s a big one. In exchange for their funds, angel investors typically seek between 10% to 50% ownership of your company. If you give up just 10%, your angel will still be entitled to have a say in your business decisions. If you give up 50%? You’re suddenly no longer the primary decision-maker.
- Your angel could be a flop. If you’ve got a brand-new investor on your hands, they may end up guiding you with poor advice. Carefully consider your options before you sign on the dotted line! You don’t want to hand over any control to someone who might inadvertently wreak havoc on your organization.
How to Find an Angel Investor
Before you go out searching for investors, you’ve got to perfect your business pitch. This is your Shark Tank moment. You better have your PowerPoint and samples ready to go! If they like your pitch, they’ll want to see your plan. Don’t ever go into a pitch without a fully fleshed-out business plan!
After you’ve prepared for your meeting…you’ve got to go meet people. After the past few years we’ve had, that might be easier said than done. Baby steps! Most investors are looking to invest in their own community, so start your search locally. Attend industry events and meetings in your area, and solicit referrals from local business organizations or schools.
You can also search for angels online. This method can be a bit more challenging, but it’s an avenue that’s definitely worth exploring. LinkedIn is a great way to directly contact potential angel investors, and these online resources offer additional sources of funding:
- Angel Capital Association: ACA is the largest expert advancement association in the world, operating in the U.S., Canada, the Middle East, and South America.
- Angel Investment Network: As a small business owner, you can create a profile and submit your pitch to the database. Over 279,000 investors are active on this platform!
- Angel Messenger Forum: AMF offers a way to connect with private and corporate angel investors that have been pre-screened.
We know you’re probably ready to get searching, but hold up one second! Before you begin combing through any database, check your business plan once more. Have you outlined a solid plan for financial growth? Do you even know how much you need? Are your business investment documents in order? Are you getting hives just thinking about all of this?
We’re here to help you set a rock-solid financial plan, wherever you are in your journey. To get your (business plan) ducks in a row, contact KYN today. We’ll help you attract those angels, and set you up for long-term financial success!