If you’ve ever watched Shark Tank, you might recognize the cast of “sharks” as angel investors. Each shark has seen considerable success in business in the past and wants to put their personal money toward exciting new ideas.
And boy, do they invest. Sometimes the sharks offer hundreds of thousands of dollars — and expect to own a big percentage of the company in return. They make a lot of deals, but sometimes the new entrepreneurs are the ones turning down offers, not the other way around.
While the idea of jumping into a sea of sharks might be scary, try not to be intimidated by the idea of asking an angel to invest in your business.
Angel investors get their name from their supportive nature. Instead of expecting an immediate return on their investment in a new business, angels instead take a percentage of the company, later enjoying the profits from their investment as the company grows.
Who are these angels?
The typical angel investor is a successful entrepreneur who wants to invest not just their own money, but also their expertise into a burgeoning business. They tend to invest close to home so they can have face time with the company’s founders or executives. Angels vary in the amount of involvement they wish to have in a company they’ve invested in, but it’s safe to say that an experienced investor’s perspective is usually a welcome sight for a business owner hoping to strike gold.
Angels hope to recoup five to 10 times their original investment within 10 years of writing a check. A return of five times the investment in seven years is often considered the best-case scenario.
When should I look for an angel investor?
Angels typically come into play when a new company has proved its concept is viable in the existing marketplace. Those companies are typically in the process of designing and developing their products.
An angel investor is not likely to swoop in to assist a small business in its infancy. According to the Angel Research Institute, companies hoping to recruit an angel investor should have a three-to-five-year financial model and a strong business plan. You should be able to demonstrate annual revenues of about $10 million in within three to seven years.
Too small for an angel?
Worried your business idea will never garner support from an angel? Don’t count yourself out yet. A crowdfunding campaign based on rewards or perks might help you test the strength of your product idea; a few thousand dollars could be enough to kick off your business and eventually gain the attention of investors.
There’s no single “best” option for businesses seeking financing, so don’t feel pressured to seek investors of any kind unless you’re confident those investors will support your business for years to come.
If you do think an angel investor is a good fit for your new business, start practicing your elevator pitch now! Team up with a SCORE mentor to practice answering questions that potential investors will ask. The better prepared you are to make the ask for a considerable investment, the more likely you are to receive a “yes.”