Small Business

5 tips on how to woo a deep-pocketed angel investor to fund your big idea

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Several years ago Bryanne Leeming had little more than a promising business idea and a prototype for a device to teach kids how to code through recess-style play. Today her Boston-based start-up has 10 employees, and its initial product, Unruly Splats, is used by schools in 45 states and six Canadian provinces.

Leeming’s company, Unruly Studios, has clearly benefited from the demand for innovative ways to teach science, technology, engineering and math (STEM). But it may not have come so far so fast without the help of angel investors, an increasingly critical source of capital and other support for high-growth start-ups.

Earlier this year, Unruly Studios landed $1.8 million in seed funding from the eCoast Angel Network and other angel groups, Amazon’s Alexa Fund, as well as other investors. The capital allowed the firm to more than double its staff — adding experts in education, sales and marketing — and thus position itself for even faster growth.

Angel investing is hardly new, but it has attracted a lot more interest lately.

Why? The hit reality TV show “Shark Tank” has no doubt shined a light on the once esoteric practice, but more importantly, investors have deeper pockets these days, thanks to the longest economic expansion in U.S. history, which has produced legions of cashed-out entrepreneurs looking to stay involved in the start-up scene.

Angels are typically high-net-worth, accredited investors who buy equity stakes in fast-growing start-ups, and as part owners are often involved in strategic decisions. In recent years, however, less-affluent investors have begun to participate in angel investing via equity-crowdfunding platforms — such as SeedInvest, StartEngine and Republic — although certain federally imposed limits still apply to them.

“The world is now awash in money for early-stage start-ups,” says David Rose, a third-generation angel investor and founder of New York Angels, one of the country’s oldest and most active angel groups. Rose is also chief executive officer of Gust, an internet platform that connects accredited investors with early-stage companies.

According to the University of New Hampshire’s Center for Venture Research, the number of active angel investors grew by 16% in 2018, to 334,565, over the prior year, although the total amount of capital deployed (about $23 billion) declined slightly. The number of ventures that received angel funding last year rose by about 7%, to 66,110, over the previous year.

Wondering if you have what it takes to land an angel? Do you know where to find one or whether you even want an angel involved in your business? Here are five tips to help you navigate the world of angel investing.

1. Angel groups are a good place to start your search.

Made up of angels with varying levels of investing experience, such groups have proliferated in recent years, in part because they allow members to pool their capital to do larger deals and work together to evaluate opportunities. Rose estimates that there are about 400 angel groups in the U.S. alone. You’ll find links to hundreds of angel groups — along with some links to platforms that connect accredited investors and start-ups — in the Angel Capital Association’s membership directory.

Many angel groups invest in start-ups within specific geographic areas and/or sectors. Canada’s North Ontario Angels, for instance, is a nonprofit that connects the entrepreneurs within the region with accredited investors. The group’s members have invested more than $101 million ($133 million Canadian) in early-stage companies, much of that going to firms in the tech sector.

Some angel groups have a social bent. Pipeline Angels, for instance, not only seeks to boost the number of women in the field of angel investing but also to supply capital to women and non-binary femme social entrepreneurs. Since April 2011, nearly 400 members of the group have graduated from its angel investing bootcamp. In all, its members have invested more than $6 million in some 70 companies, including Unruly Studios.

With so many angels from which to choose, how can an entrepreneur identify reputable angels with strong track records?

For starters, check an angel’s references by talking to the last couple of entrepreneurs who have done deals with that angel, suggests Jeffrey Sohl, director of the University of New Hampshire’s Center for Venture Research. You may also want to search reputable databases, such as PitchBook and Crunchbase, for information on specific angels. Some databases are free to use, while others may be available through library platforms.

Unruly Splats is a start-up teaching kids to code through play.

Source: Unruly Splats

Sohl also suggests searching LexisNexis, a database of legal and public records, for information about specific angels. It’s also a good idea to review academic literature to familiarize yourself with the attitudes, behaviors and characteristics of angel investors in general, says Sohl.

“Due diligence is a two-way street,” he says. “As an investor performs due diligence on the entrepreneur, the entrepreneur should also perform due diligence on the angel.”

2. Consider what angels bring to the table, besides cash.

Before you pitch to an investor, do your homework, which means you should not only understand the role of angels and their considerations but how your company might benefit from their individual experiences and connections.

Angels sometimes sit on the boards of their portfolio companies (either as voting members or observers) and often provide strategic advice to management. They may, for instance, help portfolio companies break into new sales channels and/or vertically integrate their operations by striking deals with suppliers and distributors.

Angels may also help their portfolio companies attract new investors — which is exactly what Leeming experienced with Unruly Studios. Some of her company’s initial angel investors put the firm in touch with the eCoast Angel Network, which ultimately decided to lead Unruly Studios’ $1.8 million seed round.

“They’re value-add investors,” says Sohl. “Don’t just look at them as a source of cash. Look at what’s coming with the money — what kind of advice, what kind of experience.”

3. Only moonshots need apply.

Angel investing is risky business. It’s also highly illiquid, meaning that angels typically don’t see a return on their investments until their portfolio companies go public or get acquired. And that’s if they’re lucky. One study found that in the U.S., angels lose some, or all, of their money in more than half of their deals because of company failures, according to the Angel Capital Association.

Don’t just look at them as a source of cash. Look at what’s coming with the money — what kind of advice, what kind of experience.

Jeffrey Sohl

director, UNH Center for Venture Research

In exchange for the risks they take and for locking up their money for long periods, angels seek hefty returns, which is why they tend to look for the next Google or Uber, for instance, and steer clear of small businesses with limited upside potential.

According to the Angel Capital Association, angels strive to invest in innovative companies with the potential to grow to hundreds of employees and $50 million in sales within three to seven years of starting up.

“Never in your wildest dreams when you buy a share of stock on the New York Stock Exchange is your expectation that the company might go bankrupt or that the entire thing might disappear tomorrow. But that’s the way angels think,” says Rose.

“They say, ‘This is go big or go home.’ They’re looking for entrepreneurs who are trying to change the world.”

4. Show, don’t just tell.

When evaluating start-ups, angels tend to look for companies that have begun to cultivate a following among customers or potential customers — in other words, ventures that have gained some market traction. Angels, says Rose, want to hear more than just a good idea or a business plan, since technological advances have made it relatively inexpensive to get a business off the ground.

What are some ways to demonstrate market traction? Revenues and profits are obvious metrics, but entrepreneurs can also show that there’s a strong market for their goods or services by identifying pilot or beta customers, which is exactly what Leeming did when Unruly Studios was just getting started.

In late 2017 the company launched a successful Kickstarter campaign, taking pre-orders for Unruly Splats, which are programmable light-up floor buttons. It used its Kickstarter funding and some initial angel capital to deliver the pre-orders a year later, on time.

“One thing our earliest investors were excited about was our $42,000 in pre-orders from the crowdfunding campaign,” recalls Leeming. “It was strong evidence to show there was demand for Unruly Splats, because strangers were spending on them a year before we promised delivery, which showed they wanted the product and believed in our team’s ability to follow through.”

5. Look for an angel whose vision aligns with yours.

Once you strike a deal with an angel, you are no longer your own boss, says Sohl. So it only makes sense to look for an angel who not only brings valuable insight and connections to the table but also shares your goals for your company, such as a possible timeline for selling your business.

“Most entrepreneurs are independent sorts who are passionate about their businesses,” says Sohl. “They need to realize that once they take outside investment and give up equity, they’re not flying alone anymore.”

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