Angel investors (not venture capital firms) are the most likely candidates to get your businesses from a piece of paper to a proof-of-concept. These angel investors typically come in four distinct groups:
Friends and Family
Friends and family investors have their distinct plusses and minuses. The plusses are these people know you the best, so they are the closest to you in determining whether or not you are backable, as first hand references. The minuses are pretty major: these are your friends and family! It is very difficult to mix personal and professional relationships. And, as we know, only one in 10 startups is successful. So, there are very high odds you lose all the money invested by your closest friends and family, which will make for VERY awkward Thanksgiving dinners from that point on. So, if you decide to ultimately go down this road (which for many startups are their only option), make sure your friends and family know this investment is HIGHLY risky, and they should not invest the funds unless they are prepared to lose 100% of their investment (e.g., like money they would gamble in a casino).
Individual Angel Investors
As for finding angel investors directly, this is the hardest route, by far. First, because they prefer to stay anonymous. And, second, because they don't know you at all. Sometimes rich individuals have built formal family investment offices, with professional managers screening deals for them. But,if they can afford a family office, they prefer to invest $5MM+ in more typical venture investments, not $500K for a startup. Preferably, you need to find an individual that understands your industry and business model and can bring real value to the table. If they have first hand experience in your space, and they think they can help you accelerate your efforts, it is easier for them to get over the investment hurdle. So, identify those individuals, and try to figure out someone they know, who can credibly make an introduction for you.
As an example, if you think you have the next great video gaming technology, I would research what similar video game technologies have recently been sold (meaning the founder just got very cash rich), and reach out to that founder to tap into their expertise as an advisor, board member or investor. Notice, I didn't lead with investor. You need to establish credibility with this individual before jumping into the investment question. And, if he doesn't want to invest, he may know others in the industry that would, so ask him for references. Venture capital firms are also aware of key angels in their market, so reach out to them for guidance. Angel List is a particularly good resource that makes finding angels for your region/industry easier than ever, so check them out as a good place to start. But, again, look for credible relationships to help open the door for you, preferably to investor is your home market (as most angels tend to bias local investments).
Angel Investor Networks
This category, is my favorite category: networks aggregating angel investors. Like the family offices, investors set aside funds for angel investments, screened by a professional team that sources deals for the network. So, the individual angel gets to keep their anonimity and have the comfort of a team of smart managers doing due diligence on investment targets, on their behalf. So, instead of one angel investing $1MM by themself, 100 angels aggregate $100MM and invest as a group in the deals they like the best, individually or collectively. And, on the flipside, it is much easier for you to raise your full amount needed, with one phone call, instead of calling the numerous investors individually.
Here in Chicago, the two largest angel networks are Hyde Park Angels and Cornerstone Angels (click here to see a broader list of Chicago investors). These angel networks very much prefer to invest in their own backyard. So, if you live in Chicago, reach out to networks like these. If you live in another city, you will need to research who the angel networks are in or near that city. As a national resource, I stumbled on this great list of angel investors sorted by region of the country, at the Angel Capital Association website.
Via Fund Raising Advisers
If all of the above fails, you should consider engaging a boutique startup fund raising adviser. The problem with this road is raising funds via this channel can be more expensive, with the advisor typically taking a 5%-7% success fee in cash, plus the same dollar amount in warrants to buy into the deal, and often times, plus a monthly retainer to cover their costs. So, if you are not confident in your own abilities to raise capital, perhaps an outside adviser can help. But, like investors themselves, advisers typically take on clients they think will be easiest to sell to investors. So, make sure your story will resonate with them too.
Hopefully, this information helped to make the angel identification process "less scary", knowing there are viable angel investor options which can be pursued. And, over time, expect more and more angels to get more active in early stage investing as a core part of their portfolios. Especially, with the rise in crowdfunding options (learn more about crowdfunding here).
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George Deeb is a growth consultant at Red Rocket Ventures, and author of "101 Startup Lessons--An Entrepreneur's Handbook".
