How to Interest an Angel Investor in Your Business

Although people frequently perceive "angel investors" to be compassionate individuals who fund start-ups out of the kindness of their hearts, the truth is a little less whimsical. Angels invest for the sole purpose to reap a profit, the same as you and me. They invest with the hope or expectation that their investments will pay off and they'll earn a lot more in return for the risk they're taking. Many of them are current or former company owners themselves, willing to put a large amount of money on the line for start-up ventures that seem promising.

Until recently, angels have been, at best, elusive to the average start-up business owner. This is understandable, because it's unpleasant to be hounded by thousands of entrepreneurs who inundate their e-mail with pleas or business plans, and getting the shakedown every time they step out of their office. In recent years, however, angels have begun to form groups in order to reveal themselves to individuals with viable business ideas. These groups are usually local, with up to 200 investors who have an interest in empowering start-ups. Investors benefit from the organization within the group structure, allowing for more efficient filtering of business plans from which they select a few would-be business owners to present their ideas. Even if the entrepreneur doesn't warrant a presentation, by approaching these groups they can get feedback on how to improve their business plan to increase the chances of finding funds down the road.

As organizations go, angel groups have a vast variation. Some allow business plans by e-mail, or even have an online form to fill out. A screening board will then select a few plans to be investigated further, and from that pool a few will be selected to present their ideas before the entire group. Many times the individual angel members will decide whether to fund your venture themselves, but often they have a fund to which they've all contributed and will decide whether to allocate some of those funds to the business in question.

What qualities in a business that angels are looking for don't vary nearly as much as their organizational structure. Simply put, they want "high-growth companies", or businesses that are the most likely to grow 30% to 50% per year, at which point they can either go public or be bought. They're looking for a way to make a profitable exit, but too many business plans they see don't fit this criteria-and therefore get put on the reject pile.

If your business is in the technology industry, you may be in luck. Recent studies have indicated that the majority of investing done by angel groups is in high-tech companies, specifically software. Angels find the greatest return on their investment in the technology sector, so for now technology seems to be the way to go. Also, angel investors tend to put their money in technology companies because manufacturing companies and other businesses with resources are able to obtain loans based on collateral from banks.

If you need funding, the best time to present your business plan to angel investors is when you reach the "go-to-market" stage-that's where you have a working prototype, are able to display it to the investors, and already have some early discussion and/or partnerships. This is also the time where the experience angels warn business owners on what not to do so they can avoid trouble in the future.

Although angel groups are now the most visible sources of angel funding, they in fact represent less than 20% of all the current angels out there. Individuals are still waiting in the background, silently investing their money in ventures they think are worth taking a risk on. There are also regular investment firms that perform angel investing work on the side, such as venture capital firms specializing in early start-ups.

Navigating the rough waters of investing to reach a deal (especially with a start-up) will always be complicated, and you can be sure there will be disagreements along the way, but ultimately both sides want the business to succeed. Who knows, if your business does succeed, you may find yourself eventually taking the role of an angel investor yourself down the road.