How 2 Undertand Angel Investors
The following post is from Sara Wu ’17, a Butler Venture Accelerator team member.
Last fall, we had the honor of having Ziad Moukheiber at Babson for How to Understand Angel Investors. Ziad is an active angel investor and is currently CEO of Boston Harbor Angels, one of the top angel groups in the US. Ziad is also on the board of businesses and nonprofit businesses with a special interest in technology and entrepreneurship. Ziad shared what it means to be an angel investor and what entrepreneurs can do to better understand them.
Who qualifies as an angel investor?
An angel investor is an affluent accredited professional who provides capital for a business startup, usually in exchange for convertible debt or ownership equity.
Composition of Angel Investors
Angel investors can be an individual, a group or a syndicate that allocate their interests across a variety of specialties, both locally or overseas. There are two major types of angel investors, a fund and an individual. When there is a fund of angel investors (usually five-six people), the investment decision is often done through votes which helps mitigate risk. If it is an individual investor, there will be more risk involved but a greater potential return (it really depends on personal preferences sometimes!) Typically through angel investors, an entrepreneur is able to raise between $250K to $2M, and the valuation of the business is usually in between $1M to $5M. The expected return of an angel investor is usually ten times the investment per deal.
According to Ziad, there are typically six stages an entrepreneur goes through when approaching angel investors:
- Screening: investors go through all applications and reviews the eligibility
- Group Pitch
- Due Diligence
- Deal Negotiation: entrepreneurs and investors discuss about method of investment, amount of capital and time frame of return
As an entrepreneur starting a new business, there are several sources of capital you should approach according to the stage of your venture. At the early stage, you should approach family and friends, at least to get your venture off the ground. Angel investors are usually the second step after family friends. When your business starts growing more and more, that is when you head over to Venture Capitals and at later stage of growth, you will probably want to approach later stage VC, Investment Banks and Private Equity. Angel investors are typically not in favor of Venture Capitals, because they dilute angel investors’ share of the company through intensive investment.
As an entrepreneur, what should you do?
- Have a solid team: angel investors invest in people, not project or product!
- Start your venture: search for as many investment platform/opportunities as possible before approaching an angel investor (family/friends, crowdfunding, etc.)
- Find the right time and track your business: understand the life cycle of your business and find the right time to present your business to investors.
See you for #How2Tuesday this February!
What are #How2Tuesdays?:
Want to learn something really practical to get your startup moving in the right direction? #How2Tuesdays are short, workshop style sessions meant to bring you very specific, user friendly instruction on some of the most important things you need to know how to do for your venture. Every Tuesday at 5pm in the Blank Center!