(ThyBlackMan.com) Shark Tank! Most of us have seen or heard about the show. An inventor goes in front of three very wealthy investors and pitches the business or product. The investors, if they like the business, bid against each other to make the offer to the owner. The inventor says YES I like the offer or NO, it isn’t enough!
This makes for good TV. The unfortunate thing about Shark Tank is that isn’t how it really works. In this article, I am going to teach you how angel investing really works. Let’s Go!
The Benefits of Getting Angel Investor Dollars
Like any form of investment, one of the benefits is that you have cash that will help you grow and expand your business. This will allow you to, hopefully, make much more money in the future. An additional benefit is that angels often help your business with strong mentoring and management help. This allows you to have people on your team that can really skyrocket your business to success.
What Is an Angel Investor?
An angel investor is a wealthy person or group of wealthy individuals who invest in businesses for profit, hobby or both. They usually invest anywhere between $150,000 and $2 million, sometimes more or less depending on their focus. Often they were entrepreneurs or business men and women. What this means for you is that unlike family and friend investors from the last article, they are usually much more sophisticated investors.
Unlike a bank or venture capital, (we will talk about that in the next article) angel investors invest their own money. What this means is that some angels will invest in companies that are much riskier than other types of investors.
The unique thing about angel investors is that because it is their own money they all have different personality types and approaches to investing. Some invest for the thrill of seeing a company take off and make them money, others only focus on specific types of companies to invest in and others take a much safer approach to investing.
Over the last few years, there has been a big increase in “Angel Groups”. Angel groups are groups of wealthy investors that get together and talk about deals. Sometimes they co-invest. If an investment type is outside of their comfort zone, they may refer it to a friend.
What is an Angel Looking For?
Angel investors are typically looking for three things:
- A company that can provide them with a high return on investment.
- A piece of the company.
- A company that will accept mentoring and management support.
A company that can provide them with a high return on investment
The primary motivation of virtually all angel investors is making money. In investor language this is called getting a return on investment, otherwise called ROI. While this is most definitely NOT a finance class I think you need to understand the basics of ROI because we will talk about this again when we talk about venture capital.
ROI is the percentage of annual money an investor makes by investing in your company. Here is a simple example. If an investor puts in $100,000 into your company and makes $10,000 of that back in the first year, his ROI is 10%. This is calculated this way $10,000 (money made) /divided by
$100,000 (money invested). It gets much more complex than this but this is the basic way to calculate it.
To put that in perspective, most angel investors want AT LEAST 25% ROI PER YEAR. This means they expect your company to make ALOT OF MONEY!
To put this in even MORE perspective, most of us are familiar with savings accounts. Right now, savings accounts pay you about 1% or less every year based upon how much you keep in your account. If you put that $100,000 investment into a savings account, you would only get $1,000 back per year. At 25%, the investor expects $25,000 back per year!
So what does this mean for you?
This means that you have to TOTALLY BE ON POINT with your businesses. They are expecting you to grow and grow fast, which is why they are putting money into you in the first place. The angel investor wants to see that you:
- Have a great product or business idea
- Understand the market for the business idea
- Have a strong staff and management team in place
- Have a solid plan for the business in place
- Be able to explain when the investor can sell their share of the business and make their money back plus more
Angel Investors Want an Ownership Piece of Your Company
Unlike friends and family, which may or may not want part ownership in your company, angel investors always do. In fact, what investment usually means in business is that someone is giving money for a piece of ownership.
The amount of ownership you give up is negotiable. Sometimes these negotiations can become very sophisticated. You should always retain a lawyer if you are serious about getting money from an angel investor.
Another thing to consider is that angels don’t want to own your company forever. They want to make their money and get out. According to investmentuk.net the average angel investor wants to be able to sell their stake in your company within seven years.
How to Prepare for an Angel
Is your company is ready for an angel and are you are ready to start pursuing and angel? Three things to consider if you think so are:
- Does your company really need the level of money angels typically invest?
- Do you really understand the market for your product and your return on investment?
- Do you know what you will give up to get funded?
Does your company really need the amount you will request from an angel?
The first question you need to consider is whether you are asking for the right amount. While it varies, most angel investors are looking to invest between $150,000 to $2 million, maybe more. Do you really need that much or are their other ways to get funding without giving up ownership in your company.
You should go over all funding scenarios before you decide to take money from an angel investor.
Do you really understand the market and return on investment?
Investors are going to hammer you on your market, your market projections, why you think you can capture than market and how much you can make over time. You need to do extensive research in this area before talking to an angel.
At the end of the day, the angel is going to make a decision on whether to invest or not based upon your research and his or her research. If they don’t believe the market is what you say it is or they don’t believe you can deliver the return on their investment they won’t invest.
Do you know what you will give up to get funded?
Remember, when an angel invests in your company they are taking an ownership percentage of your company. How much ownership are you willing to give up? Not only will you be giving up ownership, an angel investor will want to help manage the company.
Often angel mentoring and management help is very beneficial and this is why some business owners like angel investments. Other times, however, they may want to take your company in a direction you don’t like. You may have no choice but to go along depending on how big a percentage they own of your company. Again, this is part of the negotiation between you and the angel. If you don’t like their terms seek another type of funding or another angel.
Conclusion
Angel investors can be very beneficial if your company is ready for that type of investment. Their cash can help you grow and they can bring a strong team to mentor and help manage your company.
They will be looking for a very high return on investment though. This means you really have to know your business and the market for you business before you go before an angel investor.
Because investing means that they will give you money for ownership in your company you need to know how much ownership you willing give up. This is all negotiable and if you don’t like what they are offering or how much they want to take find another funding source.
Part 4;
https://thyblackman.com/2014/08/12/part-4-getting-money-from-family-and-friends/
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