When it comes to figuring out funding for your business, bootstrapping and venture capital tend to be the two areas most founders focus on. But there is a third avenue for acquiring backing to be aware of: angel investing.
Angel investing is when individuals provide financial support to early-stage startups in exchange for an ownership stake. These investors, often called angels, offer not only capital but also mentorship and expertise to help the startups succeed. As such, angel investing plays a vital role in fostering innovation and entrepreneurial growth by fueling promising ideas and businesses.
How angel investing differs from VC funding
Angels are individual investors, and the capital they provide early-stage startups comes from their own personal funds, while venture capital funding involves institutional investors managing pooled funds from various sources.
Often, angels invest smaller amounts and are more hands-on, providing mentorship and guidance, while venture capitalists typically invest larger amounts and focus on scaling and maximizing returns.
And the last main distinction is that angel investors are usually involved in the early stages of a startup, whereas venture capitalists typically come in during the later stages when the business is more established.
The amount angel investors invest in a company can vary widely depending on factors such as the stage of the startup, the industry, the specific investment opportunity, and the individual investor's preferences. Angel investments typically range from tens of thousands to a few million dollars.
However, it's important to note that angel investors typically invest smaller amounts compared to venture capitalists or other institutional investors who often provide larger funding rounds in later stages of a company's growth. The exact investment amount is usually negotiated between the angel investor and the startup, taking into account the company's valuation, potential growth, and the investor's desired ownership stake.
In the United States alone, it’s estimated that thousands of companies receive angel investments each year. Additionally, angel investing is prevalent in many other countries with active startup ecosystems, such as the United Kingdom, Canada, and India, contributing to a significant number of companies benefiting from angel investments worldwide.
While angel investing is common, it can still be intimidating to navigate the process for founders looking to align with angel investors given how hands-on they are in the developmental stages of brand building. Like any relationship, you really want to ensure it’s a good fit, says Diarrha Ndiaye, founder of Ami Colé, who found an ideal partner in content creator, influencer, and angel investor Hannah Bronfman when she launched her clean beauty line formulated for melanin-rich skin in 2022.
“It really was important for me to have people on my team really rooting for this and trying to be a part of the culture and moving the narrative forward,” says Ndiaya.
How Hannah Bronfman got into angel investing
Ami Colé is one of 40 companies Bronfman currently invests in (others include Ceremonia, Our Place, Live Tinted, Golde, Topicals, Wellory, Sienna Naturals, and Supergreat), and the angel investor says that while the process of backing a company like Ndiaye’s is definitely about business—it’s also personal.
In 2013, Bronfman says “shit hit the fan” for her wellness brand HBFIT, which she recently closed down after 10 years. At the time, Bronfman says the venture capital firm she was with wasn’t a fit anymore, and her company’s future seemed uncertain. “My angel investors essentially handed me a life jacket on a sinking ship,” she recalls. “I just remember thinking: One day, I'm going to do this for someone else. I'm going to pay this forward.”
At this point, Bronfman is very clear on what she’s looking for in a potential company to invest in, and whether you’re hoping to pitch yourself or not, her perspective can help you prepare for the process of angel investing in general.
What she looks for in a potential company to invest in as an angel
“My criteria now is a little different than my criteria when I first started angel investing,” says Bronfman, adding that the list is ever-evolving. While these are the factors she looks for now, they’ll likely be different with more lessons. However, there is a bottom line: “My thesis is investing in products and platforms that are better for you and the environment,” she says.
Currently, there are four things Bronfman searches for in companies. First up: a compelling founder story. “I would love for it to be a woman or a person of color,” Bronfman says. “Or a founder who has bootstrapped up until the point that they're raising capital.” This also means that Bronfman tends to back brands that are in their post-launch phase.
Bronfman is also looking at why this product is a fit for the market. How is it better for people and the environment and how will it stand out from others like it? On that same note, the angel usually requires that she is personally, not just fiscally, invested in the product. “It really has to be a product that I would use and champion,” she says.
How to find angel investors
It's important for entrepreneurs to prepare a compelling pitch deck and be proactive in networking and reaching out to potential angel investors. Building relationships, attending industry events, and leveraging online platforms can significantly increase the chances of finding angel investors for funding their startup. Here's where to start.
1. Personal and professional networks: Entrepreneurs often tap into their personal and professional networks to seek introductions or referrals to potential angel investors. This includes reaching out to friends, family, mentors, industry contacts, or alumni networks who may have connections with angel investors.
2. Angel investor networks: There are formal networks and groups of angel investors that entrepreneurs can access. These networks typically consist of individuals interested in investing in startups and provide a platform for connecting with potential angel investors. Examples of such networks include AngelList, Gust, and local angel investor associations.
3. Pitch events and competitions: Startups can participate in pitch events, demo days, or startup competitions where angel investors often attend or judge. These events provide opportunities for entrepreneurs to showcase their business ideas and potentially attract angel investment.
4. Online platforms and crowdfunding: Online platforms like Kickstarter, Indiegogo, or equity crowdfunding platforms allow entrepreneurs to present their business idea or product to a wider audience, including potential angel investors. These platforms provide a mechanism for raising funds directly from individual investors.
5. Incubators and accelerators: Joining startup incubators or accelerators can offer access to a network of angel investors. These programs often provide mentorship, resources, and investor connections to startups, increasing their chances of finding angel investors.
6. Angel investor directories and databases: Some websites and directories compile information about angel investors, including their investment preferences, industries of interest, and contact details. Entrepreneurs can research and reach out to these investors directly.
Bronfman's 3 tips for pitching potential angel investors
1. Provide a strong profit and loss statement (PnL)
PnL stands for profit and loss and denotes what your business already has made, or stands to make, as well as what it has already lost or what it could lose. “It’s really important to have the financials baked out prior to talking to anyone for investment,” says Bronfman. “And if that's not a skill set you have for yourself, you need to outsource that.”
2. Embody conviction and confidence, while being open to feedback
“A founder with conviction and confidence is definitely a plus, but you're also looking for that fine line of someone who can really listen and take feedback, and not be overly emotional about their business,” she adds.
3. Have feedback from consumers
“Even if it's like a beta set of consumers you're testing your product on, it's just really important to have that customer feedback to help the momentum of what you're trying to create with your business,” says Bronfman.
Tying it all together
While it's never too early to start thinking about funding for your company. Founders should wait to start looking for angel investors until they're at a stage where their business idea has gained some traction, demonstrating potential for growth and attracting investor interest.
Typically, this occurs after the initial concept has been validated, a minimum viable product (MVP) has been developed, and there is evidence of market demand or early customer adoption. Seeking angel investors at this point allows founders to leverage their support to accelerate growth, access capital for scaling operations, and benefit from their experience and networks.
That said, the specific timing can vary depending on the industry, market conditions, and individual circumstances, so it's essential for founders to evaluate their own business's readiness and alignment with investor expectations on an ongoing basis. Bottom line: You want to make sure you've got some runway beneath your wings.