How to find angel investors
Angel investors are wealthy, experienced businesspeople who invest their time and money in high-growth businesses in exchange for equity. They are generally people who have amassed experience, networks and knowledge in an industry. Most are entrepreneurs themselves who’ve been through the highs and lows of managing a business, making their advice invaluable.
“Ideally, you are looking for someone who is knowledgeable in your sector and has experience in working with start-up companies, because then they can be mentors and can help you in building important business connections,” says Robert Simon, Senior Managing Partner, BDC Capital.
Angel investors are often the first to invest in early-stage businesses providing seed funding. That financial contribution also carries a lot of weight with future institutional investors.
“It’s a vote of confidence that can help attract venture capital funding,” says Dominique Bélanger, Managing Director, Growth Venture Co-Investment Fund.
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Motivation of angel investors
The motivation behind investing can differ with each angel investor. Most invest for one of three reasons:
- Strong returns. They are looking for a promising financial return and see it in your product or service.
- Relevancy. They are exiting a role in the industry and are looking for an opportunity to remain involved.
- Generosity. They have done well in their career and want to help the next generation of entrepreneurs.
Angel investors in Canada
There are an estimated 20,000-50,000 individuals or groups in Canada who are actively investing in start-ups.
According to the National Angel Capital Organization (NACO)’s 2021 Report on Angel Investing in Canada, only 6% of entrepreneurs who initially approached structured angel groups for investment received funding. Entrepreneurs who do not receive funding, however, often receive valuable feedback and access to a network that can help them become investment ready. They may also be directed to more appropriate sources of financing.
How to find angel investors
There are a variety of ways you can find an angel investor.
- Connect with other entrepreneurs in your industry and find out how they met their investors.
- Reach out to family members or current contacts, such as your lawyer, accountant or banker, who might know some wealthy individuals looking for investments.
- Reach out to successful players in your industry that may be interested in investing and mentoring.
- Connect with angel networks such as NACO Canada and Canadian International Angel Investors.
Bélanger also suggests seeking out a business accelerator, which gives developing companies access to mentorship, investors and other support. He says they not only attract potential angel investors, but their set-up highlights for interested parties the potential of the nascent company.
“The start-ups associated with an accelerator have gone through a highly competitive selection process.”
Preparing for your meeting with an angel investor
Angels typically invest in companies that not only have great ideas, but a great team, and a track record for executing those ideas. For that reason, get to know your industry and your competition—even more than the investor.
Be fully prepared before you reach out and have all your information ready for the investor.
Show the potential angel investor a prototype or demo of your product and talk about the customers, even if they are currently non-paying, who will be using it.
Investors need to see your financial statements, including any outstanding debt, revenue projections, and the ownership and legal structure of the company.
What to prepare for your meeting with an angel investor
|An elevator pitch||A 60-second description of your company that can quickly grab an investor’s attention.|
|A pitch deck||Needs to be exciting with a focus on growth potential, enthusiastic founders and an inspiring story.|
|Financial statements and projections||Investors often like to see projections that stretch out to five years, broken down by year.|
|A product prototype or demo||Make sure your product works well, and that your demo is focused and clearly shows the strength of what you are building.|
If your mom or grandma can’t understand what you are pitching, then you’re not ready.
Approaching an angel investor
It’s important to start developing relationships with angels before you need money. If they already know you, they will be more receptive to a conversation about an investment when you’re ready. Being introduced to the investor by someone who they know and respect will generally help in securing a meeting.
When meeting with a potential investor you need to have a strong pitch. Articulate in a concise manner the problem you intend to solve and the service or product you are developing, as well as your plan for its development.
“If your mom or grandma can’t understand what you are pitching, then you’re not ready,” cautions Simon.
A pitch deck can be a powerful way to quickly present your business to new potential partners. BDC offers a free, fillable pitch-deck template.
4 tips to approach an angel investor
There are several things to consider before reaching out to a potential angel investor, according to Bélanger.
1. Pitch the investment not the product
“One of the most common mistakes I see with entrepreneurs is they are pitching products or technologies when they should be pitching an investment opportunity.”
2. Make sure you have the right investor
Do your research before you talk to a potential investor and see what they’ve invested in. “Once you’ve identified an angel, you’ll want to learn as much as you can about them. Make sure there is a fit with your goals and motivation; otherwise, you’re wasting your time and theirs.”
3. Make sure your company is ready for the investment
Your business needs to be developed enough for an investor to evaluate the opportunity.
4. Prepare to be scrutinized
“If they invest in your company, you’re going to be together for the long run, so they will also want to know a lot about you.”
Understanding the angel investor
Angel investors look for entrepreneurs who are passionate about what they are doing, knowledgeable about the product they are developing, and hungry for better customer solutions.
“With me, it was always the connection with the entrepreneur. It was about whether this was someone I could see myself spending time with and having fun with, and supporting the new product,” asserts Bélanger, also a former angel investor.
With me it was always the connection with the entrepreneur. It was about whether this was someone I could see myself spending time with and having fun with, and supporting the new product.
Advantages and disadvantages of working with angel investors
Angel investors bring with them business experience, industry relationships and customer contacts. It’s a shot in the arm for your company to be associated with a respected industry player.
There are some things to keep in mind, however, when reaching out to an angel investor.
“Since they are often investing their own resources, they may not have the deep pockets of an institutional investor. They can help get you up and running but they may not invest at every subsequent round. There are limits to how much they can invest,” says Simon.
Securing an angel investor also means losing some control of your company since you will need to hand over some equity in your company.
“Today, you own 100% of the company. Tomorrow, you are going to own less than that and be subject to the whims of either a board or outside investors. If you are uncomfortable with that—then it’s not a fit,” Simon advises.
Compensating angel investors
Start-up financing is a high-risk venture. Since there will be low returns from some of their investments, angel investors need to generate sufficient return from those that do find their footing. That’s why angels typically take on multiple investments and will be interested in your company only if it shows real growth potential.
Typically, angel investors take equity in a company in return for their investment. The angel investor makes money when someone buys their shares in the company. That can either happen when the entire company is purchased, when another investor buys the angel’s shares, or when the company goes public.
Research and understand standard financial terms used in these typical contracts. Bélanger encourages entrepreneurs to secure assistance from someone with financial or legal skills and to help them draft, negotiate, and sign all the investor agreements.
“Angels tend to invest because they like meeting entrepreneurs and discovering a problem and a solution—the legal side of the matter is not something they often find appealing.”