In this InvENting 101 post, we’re switching gears and exploring the world of Angel Investors.
While angel investors are not a part of Edison Nation’s business model, we feel it is important to provide an understanding for those who may either be very new to the inventing world or for those who want to learn more other methods to bring a product to market.
That being said, let’s dive in…
Who are angel investors and how do they work?
Angel investors are high net worth individuals that invest in early stage or start-up companies in exchange for an equity ownership interest. Angel investors may be professionals such as doctors or lawyers, former business associates or even seasoned entrepreneurs interested in helping out the next generation.
“Angels” need to meet the Securities Exchange Commission’s (SEC) definition of accredited investors, meaning they each must have a net worth of at least $1 million and make $200,000 a year (or $300,000 jointly with a spouse).
A typical angel investment can range from $25,000 to $100,000 of their own money. While there are deals that are more than $100K and less than $25K, this is the typical range. Angel Groups work to syndicate many angels together into a single investment that may average $750,000 or more. Angel groups are becoming more popular and are a great way to get investment money more quickly all at the same terms.
Angel investors typically invest in deals earlier than Venture Capitalists (learn more about Venture Capitalists below). While they do not invest in “ideas,” angel investors most commonly fund the last stage of technical development and early market entry.
Pros to angel investing:
- Angel investors are a good fit for businesses that are established enough that they are beyond the startup phase, but are still early enough in the game that they need capital to develop a product or fund a marketing strategy.
- A great angel investor will not only provide funding, but will also provide mentorship to the company – remember, as a partial equity owner, they want to ensure the business succeeds.
Cons to angel investing:
- Entrepreneurs can give away anywhere from 10 to more than 50 percent of their business.
- Investors may determine some existing employees are an obstacle to the overall success of the business and trim staff.
- As angel investors also like to see an “end game” that will allow them to see a return on their investment, they may push to make a business go “public” or get acquired by another company.
Six important characteristics a company needs to have to attract and secure an angel investor:
- The quality, passion, commitment and integrity of the founders.
- The market opportunity being addressed and the potential for the company to grow exponentially.
- A clearly thought out business plan, and early evidence of obtaining traction towards that plan.
- Interesting intellectual property.
- An appropriate valuation with reasonable terms.
- The viability of raising additional rounds of financing if progress is made.
What makes up a great pitch to an angel investor?
- A clearly articulated elevator pitch for the business.
- An executive summary or pitch deck. Make sure to answer these questions:
- Who’s your best customer?
- How much money do they make from buying your product?
- How much money will you make from selling it.
- A prototype or working model of the proposed product or service.
- Early adopters or customers.
Common mistakes (and fixes) entrepreneurs make when pitching to potential investors:
- Not explaining what problem the business solves.
- FIX: Share why customers will buy your product or service.
- Offering too many facts and numbers.
- FIX: Tell a story.
- Touting sales forecasts.
- FIX: Focus on the benefit your business offers customers.
- Being too attached to the business plan.
- FIX: Embrace new revenue opportunities.
- Discussing ownership stakes.
- FIX: Save it for the follow-up.
What’s the difference between an angel investor and a venture capitalist?
Venture capitalists (VCs) are typically formed as Limited Partnerships in which the Limited Partners invest in the venture capital fund. The fund manager is sometimes referred to as the General Partner and the job of the General Partner is to source good deals and invest in the ones they think will return the most money to the Limited Partners.
VCs invest an average of $7 million in a company and their investment will take a company through rapid growth and rapidly develop market share. VCs will help a company to grow until they are ready to go public or be acquired, so the dollars they invest will be increasingly larger and larger as the rounds progress.
While the information above is only the tip of the iceberg, it should serve as an introduction to the world of angel investors to determine if that is the best course of action for you as an inventor/entrepreneur.
At Edison Nation, it is our goal to provide your ideas the most chances for success. Obviously, we’d love to be able to share in that success with you by having you submit your idea to one of our innovation searches. At the same time, we acknowledge that sometimes the best way to provide you with an opportunity for success is to educate. Whatever the path you chose to take, we want you to be informed and make the best decision that works for you and your idea.