Angel investors — affluent women and men who fund startups, typically in exchange for equity in a growing venture — are becoming an important source of funding for up-and-coming businesses. But how do you find and woo an angel?
We asked Diane Henry, president of commercial real estate brokerage firm Red Commercial Real Estate in New York City. In addition to running her own business for the past decade, she’s a member of 37 Angels, a community of female angel investors who hope to influence the next generation of exciting business owners through funding and training programs.
Henry became an angel because “I like fueling big dreams,” she says, adding that she is primarily focused on tech startups. “I like being able to capitalize on staying ahead of trends. I like feeling connected to the future. I like offering the type of financing, mentorship and support that I did not have starting out in business.”
As an entrepreneur herself, Henry has a special understanding of what her prospective investment candidates are going through. “It has made me very tuned in to what makes founders tick and some of the challenges they might face — internally and externally,” she says. “I know what it’s like to act on a big dream and have everyone, including loved ones, look at you like you’re nuts!”
Don’t let them get you down, Henry urges. “A lot of people won’t get it. A few will. Keep those people close.” After all, they could introduce you to someone likeminded with money to invest — and meetings made through mutual acquaintances tend to work out better than those that start with cold contact, she says.
Read on to learn more about the types of investments Henry and other angels look for, aspects of angel investing most entrepreneurs don’t seem to understand, and how to ensure a positive experience for you and your business.
Edited interview excerpts below.
The Story Exchange: What do angels tend to look for in investment prospects?
Angels look for companies with potential for explosive growth. Not just a good business — of which there are many — but a company where exponential growth is both a goal and a likelihood. For me, this means the company is solving a real, compelling problem — one they can articulate simply and clearly, and that points straight to said company as the solution. It should be filling a gap in a large enough market, and its leaders should have a strong case for why they are the right company to fill it. Companies often answer the question of what makes them different with a statement such as: “We are the only company in the space doing ‘x’ thing.” But why are they the only one doing that thing? Why does doing this thing matter to their market? Why is this solution light years ahead of the next best alternative? The answers to these questions should be powerful. They should be unstoppable. Those are the companies that excite me.
The Story Exchange: Are there any warning signs that can inadvertently put an angel investor off?
Absolutely. One warning sign is getting the sense that a company is raising money for the wrong reasons. Why raise angel capital to grow the company? Why not, for instance, just operate and grow off of revenue? You want to know that the founders have a good reason for choosing the angel route. For companies that are pre-revenue, not having a real and thoughtful answer to the question of how you are going to make money is a red flag. Desperation is also not a great sign — sometimes, you get the sense that a company is trying to raise money just to stay afloat or to compensate for things that are actually weaknesses of the business.
It’s also not great when you feel like the entrepreneur is using angel capital primarily as an escape hatch to get out of a job they hate. Leaving an unfulfilling job to build a startup is awesome, but, when I see someone primarily motivated by job hate, I question if they understand the scale of the challenge ahead of them. It’s no secret that being a startup founder is considerably harder than most jobs and will pay less for a good while. So if you are in the “I have to get out of my job” camp, kindly respect the hustle. I’m actually more impressed by founders who sacrifice a job they like because they are called to build something incredible and believe in it enough to take the risk.
The Story Exchange: Which “types” of entrepreneurs in terms of business focus or size should look into angel investing?
Any scalable business can be a candidate for angel investing. The starting size of the business is not necessarily what’s important. What is important is to have a vision for how you can on-board either big contracts or big blocks of new users in order to grow at a fast pace — and that you and your team can show that you have the ability to execute on that. Companies that are business-to-consumer and hope to grow by gaining one new client at a time are going to have hard time persuading angels that they can scale. Companies looking to raise money to gain users solely through paid advertising are also a tough sell, unless some other aspect of the business is extremely valuable. Businesses that are inherently tougher to scale, include certain types of service businesses, will have to think long and hard about whether angel investment is the right course. Scalability is key.
The Story Exchange: What are some of the biggest misconceptions entrepreneurs have about angel investors?
I wonder sometimes if there is a misconception that all angels are playing with monopoly money — that the outcomes won’t matter to us — which is simply not true. I’ve heard there’s the perception that we are mean or unapproachable. As with all people, this depends on the angel — and the ones I know are quite nice. And let’s not forget the fear that we want to take over your business. Whoa! Angel investors can influence an early-stage business, but the entrepreneur should be the one running the show. There has to be mutual trust or both sides are in for a headache.
There’s also sometimes this perception that getting funded requires some kind of Jedi mind trick — that, if you can just unlock some kind of secret code, you can get to the “pot of gold.” If you are talking to the right people, this should not be the case. Instead, they should be asking you good, tough questions. If you are able to answer them, it will get you funded and actually help you build a better company.
The Story Exchange: What can an entrepreneur do to improve her chances of scoring with an angel?
Focus first on building and presenting the value of your company, rather than on raising capital. Know your company’s numbers backwards and forwards. If you are a new venture and don’t have that many numbers to know, study what you have so far. When you get the opportunity to pitch, don’t send a cofounder or team member to pitch for you who is not empowered to answer key questions about the company. Either attend the pitch yourself or prep them fully. And know to whom you are pitching. Different angels and angel groups are looking for different things, so do your homework. Finally, be ready to bring value to the table. Inspire angels to take that chance with you.