Accelerate - November 2013

The ABCs of angel investing

Ever wondered what angel investing is all about, if it could benefit your business and where to find an angel investor? Suse Reynolds, Executive Director of the Angel Association of New Zealand explains the ABCs of angel investing.

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What is angel investment and what is it not?

What is angel investment? It is investment in high-growth, IP-rich start-up companies by wealthy individuals. It is commonly understood that these individuals put anywhere from $15,000-50,000 each into deals of between $250,000-1,000,000 across a portfolio of at least ten such ventures. What isn’t angel investment? You’ll often hear angels say, “I’m not a bank”. They like to get involved. They invest for the buzz and enjoyment of “giving back” as much as for the prospect of a 10-30x return on their money.

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Why use an angel investor?

“Show me the money”... angels can do that for you. But, unless you know what you want to use that money for and how to use that money most effectively, it can do more harm than good. Angel investors ensure you make the most of the capital they provide. They come with skills, networks, experience and passion. They want to share all of these things and be involved in helping you succeed.

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When, and why, would you not use an angel investor?

Don’t use an angel investor if you don’t have global aspirations. Don’t use an angel investor if you don’t want to share the journey. And don’t use an angel investor if you don’t have plans for a “king hit” liquidity event at some stage in the next five to ten years.

Angels invest their money to get it back at some point. They are not interested in lifestyle or hobby businesses. They take the risk of investing in your venture to share the rewards. Given the risk inherent in start-up businesses, especially high-growth ones, these need to be big rewards. Huge!

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How do you find an angel investor?

Check out the Angel Association website! And network, network, network... get out of the lab, the office, the garage... just get out! And use every online opportunity to raise the profile of your business and talk about your growth aspirations.

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Before you approach an angel investor, what should you do from your side? (Business plan, bank records, surety?)

Know how to sell your business. It’s quite different from selling your product. So know how you are going to make money. Know your market intimately, know your competitors intimately, know exactly where the revenue is going to come from, and how you are going to scale the revenue-making opportunity massively.

Once you know all this, be sure it’s all accessible and evidenced.

So have a clear business plan, tidy legals (employment and sales agreements, a constitution and a shareholders’ agreement), tight financials (tax records, accounting systems, cash flow forecasts) and good governance.

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What are the risks (if any) when dealing with angel investors?

The key risk in dealing with angel investors is lack of alignment. Do you share the same vision and how you’ll execute that vision? Be sure you both know what you want out of the relationship. And it is a relationship. Do your own due diligence on any potential investor. What are they really like to work with?

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How do you get the right mix of investment money and useful management advice/input from an angel investor(s)?

See above! Also take the time to work through the term sheet carefully before you close the deal. Be sure you both have the same understanding of the key terms of the deal. This is a discussion you will have with the lead investor, who will represent other angels.

Be sure you are asking for enough money, particularly in early rounds. Check the views of others investing, with regard to this aspect of your first round of raising capital. Management advice and input is especially important in series A and B rounds. Be sure you build the right base from which to grow.

Updated: 7 September 2015