Should I Seek Out an Angel Investor?

Business success requires savvy planning, creative thinking, and, of course, considerable financing. Entrepreneurs looking to get their next big idea off the ground might find success from any number of investment opportunities. And, for some young businesses, an angel investor may be the best route to financial stability and success.

The question is, “Do I need an angel investor?” Maybe. The answer will depend on several factors that we will break down—from financial goals to investment expectations.

Determine Your Investment Stage

While venture capital firms typically look to invest in emerging businesses with some financial foothold in the market, angel investors generally invest at the earliest stage of a business. Also known as seed money, this funding takes place at a critical junction in a business’ early life. 

Businesses often need a cash influx long before any viable product is produced, and this early funding is essential to provide resources, including:

• Digital infrastructure
• Office space
• Market research
• Early team employment

If your young business has yet to launch, and you require funding to continue your operations, an angel investor may be the ideal solution. Angel investors are interested in an idea more than a finished product, willing to take a financial risk without necessitating proof of concept.

Establish Your Financial Goals

What do you need from a financial partner? Estimating your budgetary needs is an early step on the path toward funding. Initial angel investor financing is often about securing the resources to complete a workable product. 

When considering an angel investor partnership, it is crucial to understand the financial leverage this type of investment may provide. While angel investors vary considerably in terms of interests and contributions, general considerations include:

• Modest contributions – Where venture capital firms often write million-dollar checks to up-and-coming entrepreneurs, angel investors typically deal with smaller sums. Often, angel investors contribute less than $100,000 to startups. Enough to continue pushing toward quarterly goals.
• Reinvestment – Angel investors often look to reinvest in their successful ventures, providing cash injections at various stages of financing. While they are often only involved with a business for five years or less, there can be numerous opportunities for further capital investment.
• Personal investment – Angel investors are typically working with their personal wealth. You can generally expect different risk behavior and return on investment expectations from private investors.

There are fewer strings attached to angel investment compared to traditional funding mechanisms like business loans. You will have no expectation to repay angel investor loans in the case of bankruptcy, nor will you need to deal with the various commissions and regulations from traditional investments.

Consider Your Partnership Potential

Angel investors are more than high-value individuals looking for new financial opportunities. They are business partners primarily looking to build short-term business relationships (although longer-term is not uncommon), expand professional networks, and connect with the next generation of innovators. 

Consider the following aspects of angel investor partnerships:

• Shared control – Often entrepreneurs themselves, angel investors may be interested in your business because of their prior experience in your industry. For some endeavors, an angel investor with expertise can provide additional support and extended competence.

• Equity dilution – Angel investors contribute funds to your business in exchange for equity within your business. It is not uncommon for angel investors to request 20 to 25 percent control of your venture. Consider the equity cost of your partnership and what it might mean financially in the long run.

• Independence – Your angel investor may offer pragmatic advice, suggestions, and speculations, but they are unlikely to take up an official board seat at your company. Angel investors are not usually involved in the day-to-day operations of their investments. 

As networking partners, introductions to angel investors’ contacts will count among the potential benefits they provide—aside from a secured financial runway.

Calculate Your Growth Potential

While many angel investors may be won over by a powerful idea and a spirited presentation, most will also require some research and a vision of your business’ future. Before you seek out angel investors and secure funding, you will want actionable information to back up your business.

Prove your growth and investment return potential by exploring these factors before you seek funding:

• Customer solution – Every young business should bring something new to the table for customers. A safer ride, a new way to clean, a faster way to access data—whatever you are developing, you should be able to present it as a means to solve problems for a target demographic.

• Scalability – Growth is the expectation when it comes to investment. For many businesses, growth means scaling up—retaining your core business values while ramping up your size, productivity, and profitability. Investors may be most concerned with cost increases in quality drop-offs at high levels.

• Financial data – Financial leadership is crucial to evaluating your business for investors. Calculate your profit and loss projections, budgetary constraints, and long-term financial expectations for a clear picture of your financial needs. 

• Experience and leadership – Before taking the next step on your financing journey, take a look at your team. If you are still looking for an essential addition to your business or are uncertain about the long-term leadership at your company, reassess your team to plan for the future.

To accurately investigate your business finances, you might consider contacting a professional. While standard accounting services can involve additional employment and exploding expenses, there are other ways to attain high-quality financial services.

Where to Meet Angel Investors

Financial partnerships are often developed and maintained through professional networks. Potential areas to interact with angel investors include:

• Local business organizations
• Online forums and digital networks
• Industry seminars
• Referrals and invitations

Stay Financially Sound with CFO Hub

Angel investor funding can change your business almost instantly. A bit of capital investment can transform your business from an underdog to a true contender in a moment. That said, it can be difficult to determine exactly where your business is—financially speaking—without the help of experts.

Fortunately, CFO Hub is here to ensure you are on the right track from initial investment to initial public offering.

Advanced accounting, controller services, and financial management—CFO Hub brings world-class services straight to your business with extensive resources and unparalleled expertise. Contact us today for a free consultation.