Many startups never get off the ground for lack of funds needed to transform their brilliant idea into a functioning business. One potential solution is to seek out an angel investor: an individual or business that that can provide startup capital in exchange for shares in the company.
While there are downsides to seeking out equity investment, an angel investor can work wonders for business owners trying to bring their idea to life.
1. Do you need an angel investor?
Angel investment isn’t appropriate for every startup.
“I think the very first question they need to ask themselves is do they actually need equity investment at all,” says Sam Hajjar, managing director of Saljar Group. “They first need to take a step back, and determine if they need external funding, because sometimes they may be able to get by with other sources, or their own internal sources of funding or through their business.”
2. Understand the drawbacks
Once a business has established that it needs equity investment, it’s important to be intimately aware of what it might mean for the future of the operation. Angel investment often entails a slight loss of control over the direction of the business to the new shareholders.
“What that means is they’re not going to want to run your business for you on a day-to-day basis – they’ll expect you to do that well – but they’ll usually request a say in critical decisions and strategic decisions. They could stop you from making key strategic decisions and things like that without their approval.”
3. Know where to look and who to ask
Hajjar insists that it’s not impossible to find investors – there are a number of equity investment networks in Australia open to pitches from entrepreneurs – but rather that it’s hard for investors to find the right company to back.
“It’s often said it’s hard to find investors – and it is: statistically only a small number people get an investment. The reality is that a lot of investors actually say that it’s quite hard to find the right company to invest in.”
The key to being that company comes down largely to knowing which avenues are open to your business, and how well prepared your pitch is. Companies like Azure Group and Saljar exist to help you with the latter. With respect to the former, The Australian Small Scale Offering Board (ASSOB), Wholesale Investor, the Australian Investor Network and Innovation Bay (an IT-focused network of which Azure Group are a member, and which helped launch daily deals site Spreets) are all Australian-based investment networks worth investigating.
4. Define the value proposition
Once aware of the benefits and risks, business owners need to begin work on how they’ll present the business concept to prospective investors. The most important factor here is to make it absolutely clear how the idea will be valuable as a business.
“The number one thing they’re looking for is to make money out of investing in that company,” says Michael Derin, CEO of Azure Group.
This often means that businesses seeking equity investment need to pose a very high value proposition.
“Investing in startups is generally considered to be a higher risk than investing in more traditional investment outlets like the stock market,” says Saljar’s Hajjar. “As a result, investors, particularly sophisticated investors, will look for the potential to make a higher return than they would get in other, more traditional investments.”
5. Do some groundwork
It’s not simply enough to wander into an investment meeting with an idea scrawled on a napkin. Investors will want to see that work has been put into the concept already.
“Businesses need to present the opportunity to an angel investor in the right light,” says Azure Group’s Derin. “Before they even approach any angel investors, they need to do some ground work in getting the business to a point where it’s going to be attractive to angel investors. They need to have something tangible about the product that they’re developing. They don’t need the perfect product; part of getting capital might be that they need it to develop the product properly. They need to substantiate why the business or the idea that they’ve got is worth investing in.”
6. Establish the risk involved
Part of this substantiation is to show that you’ve got a clearly defined conception of the risk involved.
“As a person who’s seeking investment, you need to demonstrate to the investor that you have addressed all of their key risks and opportunities associated with your venture, and that you’ve really got a clear plan for what you’re going to do,” says Hajjar.
“You really need to be able to demonstrate that you’ve investigated your market context very carefully, and that you understand it very well,” says Hajjar. “Often that will mean you’ll be able to identify the key risks honestly and objectively.”
7. Show how you plan to spend the investment
The proposition will have to detail how you plan to spend the investment, as well as demonstrating how the business will generate its own revenue.
“You have to communicate clearly what your plans are for the venture, how you propose to spend the money, how you propose to generate the revenue, and, importantly, what team and advisors you have in place to execute those plans,” says Hajjar.
8. Don’t make bold claims
It’s crucial not to oversell the idea, as experienced investors will likely see through any embellishment.
“Another thing that turns away angel investors is when people say they can take over the world in two or three years time,” he continues. “That turns away the majority of investors in a heartbeat.”
Instead, you need to be realistic and objective, while still playing up the value in your business.
“If you make ill-considered statements like ‘there are no competitors in this space and we will dominate the market’, it will make you look a little naïve and ill-prepared rather than something that’s good to invest in,” advises Hajjar. “If you try to gloss over it or paint a more attractive picture, especially with sophisticated investors who know their space, you run a big risk of that backfiring.”