This guide outlines the pros and cons of early stage investors in your business or startup, including the risks and pitfalls. Let’s say you’ve got an idea for a new product or service, something you’re convinced will fill an untapped need in some market or part of the world. You’ve got a clear vision of how your product or service will change the world, its benefits in both the short and long term. You know the people you’ll need to take your idea from conception to reality, and have a plan in place including all phases of business.
The one barrier in your way is simple but essential – Money. You lack the funding to execute the plan for your business that you know will succeed if only you were able to finance it. You’ve tapped into your own funds, spoken with family and friends, and shaken every tree you can think of, but it’s just not quite enough.
If this is your position, it may be time to turn to early-stage investors — Angel investors. They may be exactly what you need to get your idea off the ground. However, there are some risks and pitfalls involved with working with early stage investors . Let’s review.
What do good early stage investors want?
In order to secure funding from early stage investors, you’re going to need to position yourself and your idea in a way that angel investors find attractive. No matter how good your idea may be, if you’re unable to present it clearly and compellingly, you’re unlikely to have much success with angel investors.
The first thing you’ll need is a clear and succinct elevator pitch with conveys the bottom line of why your business is viable and attractive. The first impression you give is crucial. You’ll also want to have an executive summary and a clearly thought out business plan. A definite bonus would be having a working prototype (or some kind of renditions or modeling) of a product.
And early stage investors are looking for an opportunity to hit a home run, so it’s great if you can articulate the market opportunity your idea addresses and the possibility of your business growing significantly. On a personal level, if you can demonstrate passion and commitment, as well as integrity, that will make a strong impression as well.
What are early stage investors buying with their investment?
It’s important to understand the motivation of early stage investors and what they’re actually buying with their investment in your business. It’s a misconception to imagine that angel investors are actually buying your company. That isn’t the case. They are making an investment which they hope will produce a return many times what they put into it, but with the knowledge that this particular investment may not bear fruit.
And early stage investors tend to have multiple investments active at the same time, sometimes even within the same industry or market. If they like you and your team, feel good about product itself and the market it services, and believe you’ve got solid traction in comparison to any competitors, they’re likely to want to invest in you. But the world of start ups is unpredictable, and angel investors are aware of this. They’re willing to take on the risk that some start ups (like yours, potentially) will fizzle, because when one does succeed, the return tends to justify all their investments collectively.
How to find good early stage investors
In order to find good angel investors, it’s necessary to spread a wide net. Even before you reach the point you’re ready to secure funding, building connections with potential investors can help tremendously. Not only might these investors be a source of funding in the future, they can often offer invaluable advice as you plan your business. When the time comes to secure funding, your immediate network is the best place to begin. Family, friends, work colleagues past and present, and any other acquaintances can either invest themselves or introduce you to other investors who may be interested.
Another avenue toward securing early stage investors are top-tier incubators like TechStars, YCombinator or 500 Startups. These events are crawling with angel investors who possess not only money but decades of experience in the start up world who can offer guidance and support.
Angels to avoid
As you try to find the right early stage investors, there are some pitfalls to avoid. Some angel investors may seem like a wonderful opportunity, but in the end will end up harming you and your fledgling business. One thing to keep an eye out for is early stage investors who are trying to take advantage of what he or she perceives to be your lack of financial knowledge. If the process of agreeing on a term sheet drags on and grows more complicated, this angel investor might be taking advantage of you.
Another thing to be wary about are early stage investors who are litigious. These types of investors are counting on the fact that if they do take you to court, you won’t have the financial standing to fight them, and so you’re likely to back down. If an angel has a reputation or shows signs of being litigious, steer clear.
Finally, ideally you’d like to find early stage investors who are a good fit for you and your business beyond the money. Does this angel investor seem competent and knowledgeable about your industry and the market you are trying to enter? Is there a good personality and working style fit? Positive answers to those questions increase your chance of success greatly.
How things can go wrong with early stage investors
Choosing your early stage investors carefully is important, because that person is now a part of your business going forward. There are some common problems that can come up between you and an angel if you’re not careful.
One is pairing with an investor who loves your idea, but not so much you or your team. In a situation like this, issues will arise if you find you need to make revisions to your idea or pivot entirely. Try to find an angel investor who believes in you yourself as much as your idea.
Another possible source of friction is if you expect too much from an angel investor. Maybe you’re looking for the angel to find you early clients or make connections for you. This may not be possible, nor may it be what the angel is interested in doing. Use your angel investors as much as you can, but not more than you absolutely have to.
Conclusion
So, to maximize your chances of finding the right early stage investors, you should keep the following in mind:
- Prepare your business plan and initial pitch to perfection
- Spread a wide network in both your professional and personal life
- Keep an eye out for red flags that a potential angel investor may be showing
As you begin considering angel investors, it may be helpful to examine how other companies have launched their products using founding members. In all, if you work hard and keep the precepts we’ve discussed in mind, you have a great shot at finding the kind of angel investor who can help make your dream a reality.
