What are angel investors and how do you get them to invest in your business?

The right angel investors can take your business to new levels - but first, you have to win them over.

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What are angel investors?

Angel investors are wealthy people who provide financial support to entrepreneurs with lucrative business ideas or promising startup companies. In exchange, angel investors receive part of the profits and often equity in the business as well. Also known as private investors or seed investors, angel investors are in many cases personally acquainted with the business owners they support. Their investment may be in the form of a single payment or multiple cash infusions over time.

Angel investors know that investing in small companies is very risky but can yield phenomenally high returns when done smartly. Only half of Canada’s small business are likely to survive for 5 years or more, but angel investors can improve the chances of success by providing access to financing, high-level expertise, logistical support and a huge network of buyers.

Among other qualities such as profitability, angel investors look for companies run by owners who are dedicated, passionate and committed to selling their product.

Which industries are most attractive to angel investors?

Business in the any of the industries below have a higher chance of attracting angel investors, but it’s not impossible for other businesses to get investment. The key is to promote the growth potential of your business including how appealing your goods or services are and how smoothly you can transition into larger markets.

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Software

Businesses that develop software as a solution (SaaS) and other proprietary software are often scalable and have high growth potential, making these companies popular with investors.

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Technology

Companies that focus on IT, FinTech, biotechnology and networking systems are particularly attractive to investors.

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Mass market consumer goods

Early-stage financing can be a massive boost for companies with a viable product that have the potential to become a common household item.

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Equipment & specialist products

Improving on existing versions of specialized equipment can be a relatively safe way for angel investors to get a return on their capital.

How to attract angel investors to your business

Before you go about attracting investors, make sure you’re ready to put your best foot forward. Just like going on a first date, making a bad impression means you probably won’t get a second chance. Before you even start soliciting investors, make sure you’ve done the following:

  • Establish profitability, both actual and potential

You will need to convince angels that you can turn their money into even more money. To do this you need to convince them that the product or service offered by your company is able to make it happen. It must not only be profitable, but also in demand.

  • You should know the cost and profit of each product or service offered.
  • Have a realistic growth plan for attracting and retaining customers.
  • Ideally, your product or service will fill a unique and real need, or it will be objectively better than the nearest competitor. This will help you demonstrate its viability and profitability.
  • Know your market

Can your brand go worldwide, or will it always be focused in Canada? Will your customers keep buying more, or will they only ever buy once? An investor will want to know about this before deciding whether or not to get involved.

  • Some angel investors might only be interested in brands with global potential, while others might be more open to smaller opportunities.
  • Investors may be wary of companies that aim to compete with established big name brands.
  • Identify your customers’ needs and focus on how your product or service fits them. Being able to clearly demonstrate how your product can fulfill customer needs at every step can make it a more attractive investment option.
  • Identify your target audience. Is your product for men, women or children? Is it fun, educational or exciting? Is it for kids or grownups? Investors might be looking for something in particular like educational products for children. You should know exactly who your buyers are.
  • Have the numbers

The facts and figures are the evidence you need to convince investors to jump aboard. Angel investors are keen on seeing determination and passion, but only if it comes with the right numbers.

  • Income, expenditure, number of customers, prices, number of staff and everything else. Most potential investors will want to know all about these, and not having the answers will typically put them right off.
  • Both having the information and using it to make key business decisions clearly demonstrates an ability to manage your company dynamically and a desire to succeed. Angel investors are investing in you as well as your company, so it’s important to be able to actively demonstrate your competence.
  • Know what kind of deal you want

When an investor offers you money they’re offering you a deal. Remember that you are under no obligation to accept it, and that not every deal will be right for your company. They will typically want equity in exchange for financing, and/or may include repayable debt schemes or similar.

  • Establish the minimum amount of money you need from investors. This should be the smallest possible amount that can help your business achieve its stated development goals. You should generally decline any amount less than this, or try to negotiate for more.
  • Decide how much equity you are willing to part with. Do you know what you would do if a potential investor offered all the money you need in exchange for a 50% share of the company? Giving away equity can be fraught, because it might someday be worth billions. Decide how much you are willing to part with, but don’t get too ambitious and try to remain flexible. Remember that that a 10% stake in a successful company is worth more than 90% of a failing brand.

5 signs your business is ready for angel investors

If your company ticks these 5 boxes, then it’s a good candidate for angel investors. It has…

  • Outsized growth, or it’s growing faster than can be continuously managed. Bank lenders are often uncomfortable with outsized growth, while angel investors, on the other hand, often view it as a good sign that a company is quickly on the way to multiplying in value.
  • An established strategy for the coming years. A strategic vision is essential to achieving the success an angel investor hopes for, and not having a developed expansion plan is a deal-breaker.
  • A scalable business model with global potential. If your business has the potential to expand around the world without needing to be overhauled, then it has a global, scalable business model.
  • Strong management. Angel investors are investing in both you and your company. They want to see strong, committed management; creative problem-solving abilities and a person they can trust to handle large sums of money.
  • A unique product, technology or angle. What makes your company different? A unique product or technology will set you apart, while a unique focus can also show that your company has what it takes to go big.

Business loans vs. investors

Case study: From the tank to the bank

angel investor case studyJennifer Holland’s 15-month-old baby had a sore throat when she visited her doctor. With a light in one hand and a tongue depressor in the other, the doctor asked Jennifer to restrain her child while they took a look. Holland wondered why they didn’t simply use light-up tongue depressors.

A quick Google search revealed that such a thing didn’t yet exist in a cost-effective package. Throat Scope was born a month lates, becoming the world’s newest manufacturer of cost effective, patented light-up tongue depressors with disposable wooden blades.

Not long after that Holland found herself on the hit TV show, Shark Tank, asking several angel investors to back her product. Throat Scope was a unique product that had global potential and was produced by a well-managed company with a clear vision for growth.

Holland walked out of Shark Tank with a $76,000 investment from an angel investor who got a 30% stake in the company and a 5% royalty deal until the initial investment was repaid. Holland’s investor urged her to hire more people. She did so with her investment money, bringing on a corporate director and a commercialization director, who raised even more capital and helped Throat Scope go global with a number of worldwide distribution deals.

With much-needed financing and professional advice from her backer, Holland’s business grew astronomically. Although she had to give up 30% equity, in the end, everyone was a winner.

How to find angel investors

Finding an angel investor can be difficult, and competition for their attention can be fierce. There are, however, some ways to get their attention. Angels can be both individuals and groups, but both can be found in similar ways.

  • Angel business organizations. There are a number of different angel business groups. These are networks of individuals that pool funds together to invest in promising companies, and they’re one of your most promising options for locating an angel. There are both nonprofit and for-profit angel groups, and many have different focuses. Pitching your business to an angel network is a good way of speaking to many individual investors at once.
  • Networking. Building business networks and having someone put in a good word for you can help immensely. Having a business with potential, and then knowing someone who can personally recommend it to an investor is significant advantage. A good way to start is to attend local networking and Meetup events.
  • Public media (including TV shows like Shark Tank) and crowdfunding. What you see on Shark Tank is broadly similar to what you get in typical investor pitches, and the publicity alone can help a growing company. Crowdfunding can raise a lot of money, especially if you have a good product idea that people really need. Popular crowdfunding websites include Kickstarter and Indiegogo.

Alternatives to angel investors

If you’re not ready to give up equity in your business or cede any control to an angel investor, you might want to explore other ways of getting financing. Such options could include startup business loans, which are specifically designed to fund newer businesses but require strong personal credit and an equally strong business plan to get approved. The Business Development Bank of Canada (BDC) is a well-known source of startup funding.

The federal government offers financing for small- and medium-sized businesses in the form of a Canada Small Business Financing Program (CSBFP) Loan. The Canada Small Business Financing Program (CSBFP) Loan offers loans of up to $1 million to startups and small businesses that gross $1,000,000 or less per year.

You could also look into getting business loans that don’t require collateral. However, you’ll need to be operating long enough to meet minimum revenue requirements, so this option may be better for business that are growing rather than just starting out.

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