From an outsider perspective, gathering funding for a new business is viewed as simply as "Just get an investor!" This suggestion is casually stated to entrepreneurs or those who wish to be entrepreneurs in the spirit that it is the end all be all suggestion. What many do not understand is that there are many different types of investors and each bring something different to the table. Here are some of the most common investors:
Banks and Traditional Loans - loan borrowers required to produce collateral; no oversight of business as long as payments are made on loan
Angel Investors - individuals with a net worth over $1 million that seek out early stage opportunities for investment; typically provide advice and direction for company as part of investment
Venture Capitalists - individuals or companies that invest once a business is showing significant revenue; typically provide advice and direction for company
Personal Investors - family and friends that invest in your business; typically completed as gesture of goodwill
While all of these types of investors have their merit, for many entrepreneurs the goal is to pursue an angel investor (AI) as early on as possible. Having an AI does not only bring in much needed capital used to build the business, but also the advice and input of the AI themselves. Typically, you will see as part of the negotiations and initial investment, the AI will take control of a certain % of the business as a partial partner. While this obviously has an effect on future profits and how they are distributed, it also means that the AI has that % control in the business decisions. For some new business owners, this control is viewed as an intrusion on their process and their plans for the business. However, it is often the result that listening, considering and ultimately following the advice of the AI is ideal for the new business to thrive.
So, what can a business do to prove to an angel investor they are worthy of their consideration, time, and money?
Unfortunately, the answer is not as simple as understanding that an angel investor is a good partner for a new entrepreneur. The simple truth to angel investing is that every angel investor is unique and their decisions on which companies to invest in is very subjective.
Due to this overwhelming fact, a business is not guaranteed seed money by having a certain amount of qualifications or level of financial performance if they are able to set a pitch presentation with any angel investor. Some angel investors prefer to only invest in particular industries, such as e-commerce, mobile apps, software, food service or retail. Some angel investors prefer to work with larger teams and some prefer to work with individuals. Some prefer to work with teams that need a lot of help with their business and some prefer to work with teams that have everything figured out already. The list can go on and on, however, all angel investors also have one major thing in common. All angel investors do this type of work because they love to help grow new businesses.
While there are also monetary gains associated with the profession, due to most angel investments being very early on in startup businesses, they have about a 50% loss ratio (investments lost are earned back by those that succeed). This helps show that while it is a lucrative role, it is not one without fault or hard work involved (when considering the role they take on in their investments) and there are likely other less stressful opportunities to earn money out there. That is why despite the challenges faced by ensuring you end up pitching to the right angel investor at the right time, entrepreneurs should never give up because there are always going to be individuals out there investing because they want to find something to believe in and work on. That is also why it is always important to be prepared to pitch your business because you never know who is getting in the next elevator with you.