Funding your startup, part 1: Angel Investors

Starting up a business is fraught with challenges and obstacles, the most common of which is securing funding. Unless you have a fairly substantial amount of cash you can draw from (not to mention afford to lose should things not work out), funding can stop a great business from even, well, starting up.

So what do you do if you have a great idea for a business or a product that is going to change the world but no money to get it moving? We take a look at your options, starting today with ‘angel investors’.

An angel investor is someone who provides capital for a startup business, generally in exchange for ownership equity, which usually comes in the form of shares or convertible debt.

Typically these investors are business owners looking to invest their own funds while helping other businesses to succeed. It is not uncommon, though certainly not guaranteed, for angel investors to also offer business support by means of mentoring new business owners.

Because of the risk involved, angel investors often look for a substantial return on their investment, which may make it seem like an expensive way to fund your business. It’s important, though, for you to look at the long term costs and returns of bringing on an angel investor, as it may be that in real terms the cost is mitigated by the success the funding allows you to achieve.

What’s more, if more traditional, seemingly less expensive sources of capital such as bank loans are not available to you, then it makes sense to consider this route. Don’t forget to take into account any business support that may be made available through an angel investor, which should make the higher cost more palatable.

In 2003, the Icehouse business incubator founded the Ice Angels – an Auckland-based angel investment network, aimed at connecting high-potential start-up ventures with investors interested in early-stage ventures with international growth potential, within sectors including software, media, internet, communications, life sciences, and medical devices. The group now has 105 members who have collectively invested more than $30 million in 20 companies over 54 rounds.

If you think bringing an angel investor on board might be the right answer for your business, you need to do some groundwork first.

Your product or service needs to already have been developed and show potential; in other words, you’ve done your beta testing and you know (as well as you possibly can) it has solid market potential. In New Zealand, this will be strengthened by having international market potential.

You’ll also need to calculate what your capital needs are. Most investors are looking at sums of at least $100,000, and they will want to see a potential liquidity return of around ten times their investment.

Be prepared to go through a fairly rigorous screening process and for the potential angels to want to do due diligence. Now is not the time to be precious about sharing information.  Also be prepared, if successful, to give regular in-depth reports on your progress.

Angel investors are great for getting businesses up and running. It may seem like a lot to give up in the beginning, but compared with not starting up at all it’s definitely worth it, plus the motivation and mentoring they can provide could ultimately be the difference between success and failure.

Next week: venture capital