Angel investors are individuals who provide early-stage funding to startups, usually in exchange for a stake in the company in the form of equity. They play a vital role in the startup ecosystem, bridging the gap between the initial seed money and the larger capital needs later on.
But what motivates these investors to take risks on unproven ventures? What are the benefits and challenges of being an angel investor? And how can startups attract and retain the interest of these angels?
Angel investors are often successful entrepreneurs, high-net-worth individuals, or professionals who have experience and knowledge in a particular domain. They provide not only financial support, but also mentorship, guidance, feedback, and connections to the startups they invest in.
Angel investing is a high-risk, high-reward activity, as most startups fail within the first few years of operation. However, some startups may go on to become successful and generate huge returns for their investors which all had angel investors in their early days.
Benefits Of Angel Investing
Angel investing has many benefits, both for the investors and the startups they invest in. Some of the benefits are:
- Huge Financial Returns: Angel investing can potentially generate high financial returns for the investors if the startups they invest in achieve significant growth, profitability, or exit.
- Networking: Angel investors help startups network with their own portfolio companies or among their professional circle to increase their revenue base with the help of networking and connections. They can introduce the startups to potential customers, partners, or investors, who can help them scale up their business and generate more income.
- Supporting Fintech: Angel investors can help fintech startups disrupt the traditional financial sector and offer innovative solutions for payments, lending, insurance, wealth management, and personal finance. For example, Vijay Shekhar Sharma, the founder and CEO of Paytm, is an angel investor who has invested in several fintech startups, such as BharatPe, ZestMoney, and Khatabook
- Non-Financial Returns: Angel investing can also generate non-financial returns for the investors, such as personal satisfaction, social recognition, intellectual stimulation, and emotional attachment. These returns can be more important than the financial ones, especially for investors who are driven by passion, impact, or learning.
Attracting And Retaining The Interest Of Angel Investors
Angel investing is a competitive and selective process, as there are many startups seeking funding, but only a few investors are willing and able to invest.
Therefore, startups have to work hard to attract and retain the interest of angel investors and to stand out from the crowd. Some of the ways to do this are:
Build A Strong Team
Angel investors look for startups that have a strong and balanced team, with the right mix of skills, experience, and passion. They also look for team members with complementary personalities, shared vision, and good chemistry.
For example, Flipkart, one of India’s leading e-commerce platforms, was founded by two former Amazon employees, Sachin Bansal and Binny Bansal, who had a common passion for online retail and a strong technical background.
They also hired talented and motivated people who shared their vision and values, and who could handle different aspects of the business, such as marketing, operations, and customer service.
Develop A Unique Value Proposition
Angel investors look for startups that have a unique value proposition, that is, a clear and compelling statement of how the startup solves a real and significant problem for a large and growing market, and how it differentiates itself from the existing or potential competitors.
For example, Gurugram-based Proxgy, an Iot startup funded by Shark Tank India is leading the way for revolutionising blue-collar jobs with its innovative products such as smart helmets, sleeves, etc.
The company has spent 2 years in R&D and within six months of its launch, the company ordered book value of ~INR 80 Cr+ from the industry’s prominent players such as Adani, Bank of Baroda, etc.
Validate The Product-Market Fit
Angel investors look for startups that have validated their product-market fit, that is, the degree to which the startup’s product or service meets the needs and wants of the target customers, and generates positive feedback and traction.
This can be done by conducting customer interviews, surveys, experiments, or pilots, and by measuring key metrics, such as customer acquisition, retention, satisfaction, and revenue.
For example, toy manufacturer Urban Tots validated its product-market fit by launching a pilot project in Bhiwadi, Rajasthan where it offered high-quality and affordable toys to kids, and by collecting feedback from both retailers and customers.
It also measured its growth and performance by tracking metrics such as number of orders, revenue, and customer ratings. Now the company has >INR 700 Cr+ order book value.
Prepare A Convincing Pitch
Angel investors look for startups that have prepared a convincing pitch, that is, a concise and compelling presentation of the startup’s story, vision, value proposition, product-market fit, business model, traction, team, and funding needs.
The pitch should be tailored to the specific audience, context, and objective of the startup, and should highlight the most important and relevant aspects of the startup.
For example, Experiential Etc, a 360-degree activation agency that integrates cutting-edge and futuristic technology to create jaw-dropping experiences, prepared a convincing pitch for its angel investors by telling the story of how its founders, who were passionate about technology and creativity, started the company with a vision to disrupt the way traditional activations have been done.
It also showcased its unique value proposition, product-market fit, business model, traction, team, and funding needs, and how it planned to scale and grow in the future.
Build A Lasting Relationship
Angel investors look for startups that have built a lasting relationship, that is, a long-term and mutually beneficial partnership based on trust, respect, and alignment. This can be done by maintaining regular and transparent communication, providing honest and timely updates, seeking and acting on feedback, delivering on promises, and acknowledging and appreciating the contributions of the investors.
For example, VCI Chemical, the manufacturers of volatile corrosion inhibitors, built a lasting relationship with its angel investors by keeping them informed of its progress, challenges, and achievements, and by soliciting their advice and guidance on various aspects of the business. It also delivered on its milestones, met its targets, and rewarded its investors with returns and recognition.
Conclusion
Angel investing is a form of alternative financing that involves investing personal funds into startups at their early stages, in exchange for equity or convertible debt. Angel investors play a vital role in the startup ecosystem, bridging the gap between the initial seed money and the larger capital needs later on.
Angel investors are motivated by various factors, such as passion, impact, learning, and fun, and they provide not only financial support, but also mentorship, guidance, feedback, and connections to the startups they invest in.
Angel investing has many benefits, such as financial returns, non-financial returns, access to innovation, and support to startups.
