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Kicking a startup into accelerated growth mode takes capital. And a lot of it. Although startups do have options for business funding, it’s admittedly difficult to get a hold of the money you need to go big without a substantial financial track record. Some startups also don’t want to take on too much debt early on, and would rather give up equity to angel investors for small business.
Luckily, angel investors are all over the country, looking for opportunities to fund worthy startups. According to findings from a recent national study conducted in conjunction with Wharton School at the University of Pennsylvania, 63% of angel investors live outside New York, Boston, and Silicon Valley.
Maybe you’ve bootstrapped as far as you can, or are just curious about how to get funding from angel investors. We’ll go through important things to know as you start your search, how to find angel investors for small business in your sector, and what to expect when you connect with them.
Angel investors for small business are individuals who specialize in financing early-stage startups. (Occasionally, they’re groups of investors or syndicates—we’ll get to that in a bit.) Compared to the large checks that venture capital firms dole out, they provide relatively smaller amounts of capital—usually in the five-figure range, though sometimes a bit higher.
When you’re trying to figure out how to get funding from angel investors, you’ll quickly figure out that a good portion of angel investors often specialize in something. That might mean businesses within a certain industry, a specific business model, or something else like financing underrepresented founders.
Angel investing isn’t done out of the goodness of someone’s heart—it is, after all, an investment. Individuals who write checks are looking for returns, so they’ll be expecting something in exchange. Generally, that’s equity. So, angel investors for small business understand that when putting their cash into early-stage businesses, they’re making what will likely be a several-year bet. But they, just like you, are hoping for an exit of some sort so they can make some money, too.
Many angel investors are former entrepreneurs themselves who can provide informed perspectives to startup founders. But, as early-stage individuals writing relatively smaller checks, they’re not going to be immensely involved in your day to day. However, they’ll be great conduits to bigger networks and resources down the line.
As you seek out funding from angel investors, there are a few important definitions you should make sure you know:
You might be asked if you’re just looking for a single angel investor for your small business, or if you’re raising a full seed round. This is a question you’ll want to know the answer to.
To kickstart their growth with investors, some startups will take funding from just a single angel investor or two, but forego raising an entire seed round (which comes before your Series A). That gives you a deep relationship with your angels, and also allows you to retain a substantial portion of equity. Angel investors also rarely—if ever—take board seats. (Plus, raising a full funding round is a lot of work.)
That said, many companies will raise seed rounds of varying sizes in which angel investors will participate. Make certain you know where you fall, and whether or not you’re hoping to potentially engage with seed funds alongside angel investors.
This is a definition from the U.S. Securities and Exchange Commission (SEC). It’s important to know about the difference between accredited and non-accredited investors.
The part you’ll want to have a grasp of is accreditation at the individual level. As a single person, you have to have made $200,000 on your own or $300,000 jointly over the last two years with a trajectory to make similar this year. Alternatively, accredited investors can bypass the income requirement if they have a net worth of $1 million-plus. There are some other rules, too, that your lawyer certainly knows and can get in the weeds about.
The SEC requires investors to be accredited to essentially protect the general public from taking big risks. So, your angel investors will, indeed, need to be accredited. And experienced angels will know this—but you should, too, before you go out talking to just anyone about cutting a check.
You’re likely already familiar with the notion that you’ll probably have to give up equity as you search for how to get funding from angel investors. But the idea of a convertible note may be on the table, too, which is a bit more nuanced.
A convertible note is a type of short-term debt common in early-stage startup financing. With a convertible note, you’ll receive funding, but instead of paying back interest with your principal, your investor will get equity for the outstanding loan balance based on a future valuation. This is a good setup for many startups in angel and seed stages who need cash, but aren’t necessarily in a place where they’re ready to put a valuation on the company (especially if all the company has is IP, since intangible assets are difficult and highly disputed to put a price tag on).
An alternative to the convertible note is the SAFE note, which stands for “simple agreement for future equity.” Unlike the convertible note, this isn’t debt, but it does convert into equity. It’s generally shorter.
Many angels invest on their own, but there are others who work in groups.
Why? First, no matter how much money or time you have, angel investing is expensive and risky, so it’s less expensive and less risky to do it alongside others; and, subsequently, it’s less time-consuming if one person in a group does the exhausting due diligence for everyone.
There are a lot of nuances to group angel investing, which you can (and should) know about if you’re taking on funding from a syndicate. What’s most important for you to know for now is that you can find angel investors for small business from one person, or a group, which is most often helmed by a lead investor.
Just like not every startup is ready for traditional small business financing, not every startup is ready for angel funding, either. But your company might be. Before you hit the fundraising trail hard, make sure you’re at the correct inflection point:
The good news is that there’s no one direct approach to find angel investors for small business. The bad news is that there’s no one direct approach to find angel investors for small business. You know what we mean?
That said, you do have several avenues to meet angel investors. It’s a process that takes time, effort, strategy, and professionalism. But if your business is ready, one of these approaches just might work for you:
First and foremost, nothing replaces the endorsement of someone an angel investor trusts. Figure out if your startup has someone in its orbit whom you’re able to get in contact with and introduce your business to who has a direct line into an angel investor or network of angels. Your financials tell a story, certainly—but there’s little better than direct connection and support.
“The best introductions to potential investors are made by successful entrepreneurs who can vouch for you,” Vanessa Kruze, CPA, CEO and founder of startup consultancy Kruze Consulting, says. Working alongside angel-funded startups, Kruze says to meet other local startups who’ve raised and ask for intros. “Investors prefer introductions from other entrepreneurs who they respect and have worked with.”
If your network to other small businesses isn’t strong, think more specifically. Kruze adds, “Service providers like experienced startup attorneys or accountants can make warm introductions.”
Similarly, think of other ways you can backchannel into individuals or groups of investors with networks you’re part of or can easily join.
Your alumni network is a great place to start looking for known investors, groups of angels or syndicates, or connections into others who can offer you advice into how to connect. Additionally, as many research-focused universities develop incubators and accelerators for current students and alumni, affiliated venture communities are coalescing and becoming easier to find.
You also might want to look into industry trade organizations, your local chamber of commerce, or a local Small Business Development Center (SBDC). Although it might seem strange to focus hyperlocally, some of your best and most unique connections can be made at the local level when you’re not competing for the same angel funding as other startups in major cities.
Or don’t stay local—go as broad as possible. Many online platforms allow accredited angel investors the ability to essentially shop opportunities to back startups, allowing the small business funding from angel investors to come to you.
Some of these platforms include Gust, Angel Investment Network, and, perhaps most well known, AngelList. Depending on the place you choose to pursue your connection, you might be working with an individual, or you might be working with a syndicate. That’ll depend on how the platform is structured.
Plus, we shouldn’t have to tell you twice, but use social media to let people know that you’re looking for angel funding.
If you don’t have the network you want—or need—then grow it. Samantha Urban, CEO of San Diego-based service company Urban Translations, recommends events, which she says draw in hundreds of investors and CEOs. She’s secured angel funding through summits herself after just two meetings. Urban adds:
“The key [is to] build and nurture these investor relationships. Find out what type of companies they invest in (B2B, B2C, fintech, tech, etc.), what stage, how much revenue they want to see, how long they take to do due diligence, and any other factors that make them get excited over a potential deal.”
She also stresses that you’re building a relationship, slow and steady. “Never assume that you will be invested in right away,” Urban says.
This might seem like the biggest long shot of the group. And, yes, in ways it is. But it works for some startups—the difference maker if you’re going to send an email out of the blue is knowing whom you’re reaching out to.
Boston-based seed-stage software startup Fairmarkit was able to secure angel funding through cold outreach. Cofounder Tarek Alaruri says that he thinks first-time entrepreneurs can be very successful with cold outreach, as long as they keep it personal. Fairmarkit was able to connect with investors via email, LinkedIn, and over the phone, too. “If you understand the investor’s thesis and previous investments (B2B vs. B2C, or biotech vs. crypto) then you can tailor your outreach and be more successful,” he says.
Before you start forging your connections, make certain your expectations for small business angel investors are realistic.
If you’re going to reach out, make sure that you have an airtight pitch. You might not be raising a full round, but you shouldn’t take finding angel investors for small business any less seriously. You need a presentation; you need to know your numbers inside and out. You need a unique business proposition, and you need to have a vision for your company down the line. The investor needs to see a trajectory for growth and a way that they can get their money back down the line—and then some.
Next, although the checks that come in from angel investors might not be seven figures, don’t forget that angel investing still is venture capital. VC requires due diligence, which takes time on the part of the investors, and patience on yours. This process isn’t instant. In fact, far from it.
And, speaking of time, keep in mind that it’s rare for angel investors to jump right in the deep end with you. Urban Translations’s Samantha Urban says that although she’s had investors come in after just a couple of meetings, she’s had others come in after months of courting. “Become friends over time and send investors updates as often as you have good traction to share,” she says.
As you try to get funding from angel investors for small business, remember: Not every business needs an angel investor.
For instance, ecommerce company Lonely Brand was able to use their sales and growth to get loans based on their Shopify numbers. Founder Nick Kinports says the financing “has allowed us to lever up quickly without the need to take on angel investors. In fact, we recently rejected a proposal we were seriously considering because of the loans.”
If you’re questioning if you have the business financials, acumen, or network, now might actually not be your time. Don’t forget that there other business financing sources for small business, for startups, too; even a business credit card can help you get rolling in the beginning.
Urban shares one piece of advice to all businesses, regardless of where you are in the angel funding journey. “Overall,” she says, “always build your business with revenue in mind, not investment.”