However, several common stereotypes about business angels don’t hold up in practice:
1. A business angel might finance a business idea without a team or preparation.
This is a common misunderstanding. An investor, including a business angel, will only consider a startup with a clear concept, a strong team, a roadmap, and a financial model. Preparing your project for investment is key to successful interaction with any investor.
2. A business angel will be the sole source of funding.
Expecting a business angel to cover all startup expenses is entirely incorrect. Moreover, business angels rarely invest in a project unless the founder has invested their own money. Angel funding typically only covers the initial stages, and you will soon need to seek additional sources of capital, such as venture funds, crowdfunding, or even personal savings.
3. A business angel does not interfere in the project’s implementation.
In reality, business angels actively engage in managing the project. They often become shareholders, may take a seat on the board, influence strategic decisions, and demand reporting and oversight. The level of involvement varies depending on the deal’s terms.
4. Business angels are altruistic.
Despite their name, business angels are not altruistic. They expect a significant return on investment, which may include a stake in the company and profits upon exit. It’s important to remember that founders often have to give away a significant share of equity early on, which could later become very valuable.
5. Business angels are willing to fund projects regardless of risk.
This is a myth. Like any investors, business angels avoid unjustified risks. High risks associated with an underdeveloped project serve as a red flag, deterring investment.
6. Attracting a business angel is a simple process without excessive formalities.
This is not true. Attracting a business angel always requires a legally binding agreement. This contract regulates the investment terms, equity distribution, responsibilities, and management rights. Failure to comply with the agreement can result in the termination of funding, asset claims against the project and the founder, and in cases of misconduct, even criminal prosecution.
How to secure investment from a business angel
Securing investment from a business angel requires careful preparation and strategy. Here are the key steps that can help you successfully attract attention and funding:
1. Prepare a quality document package and presentation:
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- Your document package should clearly describe your product or service, market analysis, competitive advantage, marketing and sales strategy, action plan, budget, and financial projections. It’s crucial that your plan is realistic and shows exactly how you intend to succeed.
- The presentation should be concise but comprehensive. Include essential information about your team, product, market, monetization model, and projected profits. Highlight the benefits for the investor and the milestones you’ve already achieved.
2. Build a strong team:
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- Business angels invest not just in ideas but in teams. Make sure you have key specialists with the necessary skills to execute the project. Your team’s experience should inspire confidence and demonstrate that you can overcome challenges and lead the project to success.
3. Develop an MVP:
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- Having an MVP significantly increases your chances of attracting investment. It demonstrates your ability to bring the idea to life and confirms real demand for your product. An MVP also helps reduce the investor’s risk and convinces them that the project has growth potential.
4. Prepare a clear business proposal:
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- Clearly articulate what you are offering the investor: what share of the company they will receive, how profits and risks will be distributed, and what rights and obligations each party will have. The more transparent and attractive the terms are for the investor, the higher the chances of successful collaboration.
5. Get all the necessary documentation ready:
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- Legal documents governing the rights and responsibilities of both parties should be prepared in advance. This includes the company’s charter, equity distribution agreement, investment terms, and other key documents. Having all the necessary documentation shows your seriousness and readiness for collaboration.
6. Find an angel through the right channels:
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- Use specialized platforms, business clubs, conferences, and pitching sessions to find investors. Additionally, consulting firms can help you connect with the right people through their networks and contacts. It’s important to find an investor who is interested in your sector and has experience with similar projects.
7. Prepare for negotiations:
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- Negotiations with a business angel require preparation. Study their previous investments, their approach to working with projects, and their expectations and demands. Be ready to answer any questions and discuss the deal’s terms. It’s important to remain flexible but not lose sight of your goals and interests.
As you can see, preparing to meet a business angel requires time, effort, and resources. Are all these steps necessary? No, but the fewer preparatory steps you take, the lower your chances of success.
Criteria Business Angels Use to Evaluate Startups:
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- Market: Size, growth prospects, current trends.
- Idea: Uniqueness, innovation, competitive advantages.
- Team: Experience and competencies of key employees, their motivation.
- Financial model: Realism, thoroughness, and return on investment prospects.
- Exit strategy: Opportunities for a successful exit with profit, such as selling the company or attracting a new round of investment.
Remember, business angels prefer to invest in well-developed projects at a stage where there is already a working MVP and early users or customers, demonstrating real demand for the product. This reduces risk and gives angels confidence that the project has potential for scaling and further growth. A crucial criterion is also the possibility of a profitable exit, whether through the sale of the company or securing a new round of investment.
Finetic Consulting is ready to assist you at every stage of preparing your project for investment. We provide services for developing and reviewing all necessary documents, helping improve project presentations, and preparing for negotiations with investors. However, we only offer our investor search service to startups that are well-prepared and meet the criteria necessary for successful investment attraction.
Shortly, we plan to launch a new product — “Founder Assistance in Finding an Investor.” We will post applications on investor search platforms, in business clubs, on startup exchanges, as well as through our network of investors and professional communities. However, it’s important to understand that we only offer this service to startups that are well-prepared and meet the criteria necessary for successful investment attraction.
We would also like to hear your comments and suggestions. We are keen to know if you would be interested in such a service and which payment option you find more attractive — a fixed fee, a percentage of the investment amount, or a combined option. Perhaps, a percentage-based fee might not be the best choice, as we could find an investor, but the founder and the investor might not agree on the investment terms. What’s your opinion?