Over 30 million small businesses are operating in the U.S. right now. If you're ready to join that number, you know how important the funding piece is to business success.
Inadequate funding is the second biggest reason small businesses fail. The number one reason is simply no market for the product (this is why good market research is key!). As a small business owner, you have several funding sources to explore. There are federal and state grants, personal savings, and business loans.
Depending on the kind of business you're starting, Angel investors are another option to consider. Angel investors provided nearly $25 billion to small businesses in 2015. Here are five things you should know as you find angel investors.
1. What is an Angel Investor?
An angel investor is typically a business person with significant personal and business wealth. They may be individuals who gained accredited investor status with the Securities and Exchange Commission (SEC).
The SEC defines an accredited investor as someone with more than a million dollars in assets or who earned $200,000 in the previous two years. It isn't required for an angel investor to carry the accredited investor status.
2. What Does an Angel Investor Do?
An angel investor provides significant funding for both start-ups and small businesses in the early stages of growth. An angel investor might be a family member, a friend, or a fellow entrepreneur.
The angel investor might provide the money needed to get a business started, or he might fund the on-going needs of a small business for the first few years of operation. The biggest advantage of working with an angel investor is that you don't have to pay the money back if your business fails.
Angel investors are usually in the business for more than money. They may want an ownership share, for example. This is especially true when the investor believes the product or service can become the next big thing.
3. Where Do We Find Angel Investors?
One place to start is with your family and friends. Are people you know in a position to provide funding for your business? If so, can your personal or professional relationship survive a loss if the worst should happen?
You might also look for investors who are associated with a Small Business Investment Company and licensed by the Small Business Administration (SBA).
You may also find investors through crowdfunding platforms online. Many angel investors will work together and pool their capital to fund one start-up.
4. How Do We Secure an Angel Investor?
It won't be easy because this investment is risky. You can increase your chances of landing an angel investor by being as prepared as possible before you meet him or her.
Make sure you have answers to these types of questions:
- How much money have you raised?
- How much do you need?
- What are your expenses?
- What are your financial projections for the next two years?
- How will you market your product or service?
- Who is your target customer?
- Who is your competition?
You should also be prepared to talk about your company's leadership team, if applicable. What is their background? What experience do they have?
5. When Should We Seek an Angel Investor?
The quick answer to that is after you've done most of the labor-intensive work.
Ideally, your product should be finished or your service in operation and available to demonstrate to investors. At the very least, you need to be able to show proof of concept. It also helps already have invested a chunk of your own money in the business. Bootstrapping shows angels that you have your own skin in the game.
You should also have potential customers. These are people who have indicated a willingness to purchase from you. They may have provided you with a testimonial and permission to use it during your investment meetings.
One more thing to keep in mind as you find angel investors. They focus on helping start-ups get going, and they may want to own a piece of your company in return for their investment.
Score 3 Angels looks for promising entrepreneurs on a mission to solve the toughest problems. Click here to learn more about us and how we can help your business grow.