Angel investors are a critical source of funding for start-ups. In 2021, 250,000 angel investors provided $25.3 billion in funding to just over 30,000 US start-ups. The numbers were similar in Canada, where an estimated 20,000 to 50,000 individuals or groups are actively investing in early stage companies.

Angel investors are high-net-worth individuals or groups willing to provide funding to businesses in their earliest stages. Because they are often ready to take more risks and willing to take an equity stake instead of interest, they are a more attractive and available funding source. Traditional lending institutions or venture capital funding may be more challenging to acquire or offer less attractive terms. 

Even with venture capital markets tightening in response to global events, including rising inflation and interest rates, angel investors are still out there. Here is how you can find a good one willing to invest in your small business.

How to find good angel investors

The trick with angel investors is not just to reach out to any angel investors. Be strategic and find the ones that are the right fit for you and your small business. Angel investors will take their time vetting you and your business, so you need to do the same, preferably before you reach out to them. Learn as much about the angel investor as possible. Find out how they work and how hands-on they are with the companies they agree to fund. 

The best angel investors will offer more than just funding. They'll also supply invaluable experience and contacts within the industry through their established relationships with other investors.  

So how do you find the right angel investor for you? 

You may be able to find angel investors through your family and friend groups who are willing to help fund your business idea. However, there are other ways to locate professional angel investors or wealthy individuals who may be interested in investing in your business. 

• Network with other professionals and business owners
• Reach out to your professional supports, including bankers, accountants and lawyers 
• Seek out a business accelerator, an organization that specializes in helping start-ups make connections and attract 
• Join angel forums and local or industry-related business associations
• Research online angel lists, forums and social media accounts 

You can also connect directly with an angel network. In the U.S., most angel networks are regional in scope, but you can also find national or industry-specific groups. The Angel Capital Association has a great list to help you get started on your search. In Canada, try NACO Canada and the Canadian International Angel Investors.

What do angel investors want to see?

Despite the name, angel investors are not entirely about goodwill and good works. They tend to get involved in angel investing for a variety of reasons. For some, it is the thrill of seeing a fledgling company take off and prosper. For others, it is simply a way to stay involved in their industry after they've retired or moved on. 

However, for all angel investors, this is an investment, and they expect a return on that investment. Because of that, they'll want to ensure the investment is sound. 

All angel investors are looking for several things from the companies they invest in, including a comprehensive business plan and a solid and preferably experienced management team. These include:  

The Business Plan 

A business plan must tell a convincing story and offer angel investors what they are looking for, which is a solid return on their investment. Does your product or service fill a gap in the market? Is it a new or exciting idea? Can it offer excellent growth potential? The business plan is your opportunity to sell it to investors.

The business plan is where you can tell your story, explain your vision and present a convincing financial proposal. It should include your target market, a thorough marketing plan and financial projections detailing how you will stay competitive and how you intend to grow your business. 

If you have solid current statistics, leverage them. These can include rapid user adoption, high engagement, low churn, sales figures and strategic partnerships if you've made any. These are all indicators of a business with excellent success potential. Lacking these, you will want clear KPIs and a viable plan to achieve those KPIs.

An Attractive Investment Structure 

While some angel investors will offer start-ups a straightforward loan, many others look to provide funding in exchange for a share of the equity of your business. They may insist on a formal shareholder agreement which means that your business must be structured in a way that allows this. This kind of equity arrangement will mean giving up some level of control over your business in exchange for the investment.

A Strong Management Team

Angel investors are taking a risk by investing in your business, and they want to know you have the drive and vision to make that business successful. As a founder, you should have the experience, skills and temperament to drive the business forward and ensure its success. However, it won't just be about you. Savvy founders know to surround themselves with a solid team of experienced, knowledgeable people. Angel investors will also want evidence of a management team with experience in human resources, sales, research and development and accounting or finance. 

Opportunities for Involvement

Many angel investors prefer a hands-on approach. They will likely want to see opportunities where they can become involved in your business. This could include mentoring the founder and senior management. However, it could also mean taking a seat on the board of directors or taking a more active role as part of the management team. 

A Viable Exit Strategy

Angel investors are typically not in it for the long term. That means they will examine their options for exiting their investment with your company. This can include three options. For equity-based relationships, this entails a sale of the angel investor's shares, usually to the founder or principal shareholders. Loans are typically paid off by the founder or company profits or a sale or merger of the company. Another potential strategy for some companies is an initial public share offering (IPO). Angel investors will perform a risk analysis of each option before agreeing to invest in your company. 

Do you pay back angel investors?

You only have to pay back an angel investor if you take a repayable loan from one. If you agree to an exchange of equity in return for a cash infusion from an angel investor, you don't technically have to repay the loan. Instead, the investor will be compensated when you sell or merge the business or if you take the business public and sell additional shares. You can also opt to buy out the investor and regain control over the company. 

How does an angel investor work?

Angel investors can invest thousands or millions in a start-up, depending on the company's need and potential profit. Because they're investing early in the game, they're taking on more risk, and most angel investors expect a significant investment return. The ROI they expect will vary widely and depends on the investor's expectations and the industry and business they are investing in.  

These high expectations for ROI translate into an extensive vetting process for the start-ups angel investors are considering investing in. 

Scouting Process

Angel investors often start by doing an initial screening of a business. They'll look specifically at the potential ROI for their investment. Because of the high risk involved in angel investing, most will look for a return of at least 30%, possibly as high as 60%, when they are ready to exit. 

The Pitch

If an angel investor is interested in you and your business, you may be asked to pitch your concept. This can happen in an informal lunch meeting or a more formal slideshow presentation in a boardroom or office. The purpose, however, is the same. This is when you can tell your story, introduce your team and provide a brief overview of your business, its financial need and goals.

The Review and Vetting Process

Angel investors impressed by your pitch will take some time to review and confirm the details, particularly the financial details. Be prepared to answer plenty of questions at this stage and provide additional information regarding your finances, team, challenges and opportunities. 

The Agreement

Once the vetting process is complete, the investor and founder will work out the terms of the agreement. This will include the valuation and structure of the deal and possibly a due diligence report. It will, of course, also have the amount of money the angel investor is supplying, their expected share in the business's equity, and their anticipated level of involvement in the business.

The Deal

After the terms have been negotiated, lawyers from both sides – the founder and the angel investor – will put the deal in writing. Once both parties have signed the agreement, funds are transferred, and the angel investor can begin offering whatever other assistance – mentoring, advice or introductions – they agreed to provide. 

How do I get funding for my start-up?

Small business founders can tap into several sources of funding. Of course, family and friends are an option for some. There are also government grants available for specific types of start-ups. Check with your federal, state, provincial or even local municipal governments to see what might be available to you. Venture capital is a form of equity financing where a venture capital firm—or group of investors—invests in an early stage or emerging company in exchange for an equity stake in the company. This type of funding is generally more suited to companies with a product or service ready to go to market or already in the market. However, for early-stage companies, angel investors are generally the best bet. 

Founders need to carefully assess what they are willing to give up and what an angel investor has to offer in exchange—interested in learning more about angel investing vs venture capital? Read our blog, Angel investing vs venture capital.