Sourcing is the means to which an angel investor finds his deal. It reminds me of the beginning of a sales process. First you need to find a prospect and get them interested in making a deal to start the discussion. Just like a sales process, one needs to have enough prospective deals in the investor’s “funnel” in order to gain the likelihood for success. Finding a possible company for the angel investor to place tens of thousands of dollars requires marketing. Networking within industries and an online presence are essential.
Being an angel investor requires skill and finese. It is also not for the faint of heart. I learned from Winning Angels: The 7 Fundamentals of Early Stage Investing (2001) that an angel investor typically will make several deals that will lose before making a winning deal. I would imagine that it might be like a game to some investors. Naturally, they would like their investor to turn into more money. In one study that I read, almost 28% of investments lead to a negative modified internal rate of return. In another study, significant gains were only made in year five out of ten investments. Angel investing is definitely a marathon and not a sprint. However, it is also about the win. Having a good reputation as an investor can go a long way to finding great deals to make.
If you are someone that is potentially seeking the funds from angel investment, you need to stand out in the crowd. Because angels have to keep a large amount of prospective deals at the top of their “funnel,” they might be willing to look at your business plan. However, you better have a detailed plan that can realistically show a large profit in a short amount of time. This would include information on your management team, advisory board, balance sheet, and strategy for scaling the business. Angel investors also would like to see a proven plan that has potential for incremental growth. A possible exit strategy should be considered by the founders as an angel investor would like to make gains on their investment.
Knowing how an investor finds potential companies in which to pour some of their wealth into will help the person with a plan to attract an investor. According to one Forbes.Com article, 20 Things All Entrepreneurs Should Know About Angel Investors (2015), angel investors are looking for some intangible items such as passion and plan for the future. They also want to see some concrete information such as early stage success and a “prototype” of the product or service.
I am looking forward to understanding the additional steps that angel investors use to find a profitable deal. By understanding how an angel investor thinks and acts, a founder will have a much better chance at gaining financial support.
Amis, D. and Stevenson, H., (2001) Winning Angels the 7 fundamentals of early stage investing, Pearson Education Limited, ISBN 0 273 64916 7
Gregson, J., Bock, A., Harrison, R., (2017) A Review and Simulation of Business Angel Investment Returns, Northern Alberta Institute of Technology, University of Edinburg, Venture Capitalist, Oct 2017, Volume 19, Issue 4, p297-298
Harroch, R. (2015), 20 Things all Entrepreneurs Should Know About Angel Investors, Forbes, https://www.forbes.com/sites/allbusiness/2015/02/05/20-things-all-entrepreneurs-should-know-about-angel-investors/#5e7746d2c1aa, Retrieved on 5/19/2020
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