Are you an entrepreneur who needs funds but are uncertain how to identify legitimate angel investors? Angel investors are a significant source of cash for small businesses when conventional lenders are unable to produce. Angel Investors look beyond credit history. They consider how the business performs and other factors when making lending decisions.
While there are many reputable angel groups actively looking for the next great investment, it is essential to go into a deal with your eyes open. Just as with any other business propositions there are the good and the bad. Everyone who calls themselves angel investors are not what they claim. Here are a few steps to take before blindly signing on the dotted line.
Ask Questions – Go on the offensive when scouting angel investors and interview them as well. Find out how long they have been involved as an investor, in how many businesses they have invested and the standard investment amount. Angels should be able to answer these questions quickly and confidently. You can end up spinning your wheels, wasting time on an “investor” who never ponies up.
Research – Start with basic research on the potential investors. Just about everyone is on the web today. Check to see if the individual has a criminal record or anything suspect in their past dealings. Look at databases online and double check any facts they gave you. Try to sniff out any inconsistencies in what they are presenting and what is recorded. If you come up empty with an online search, this is a serious red flag. A reputable angel investor should have some sort of online presence. If they don’t have a digital trail, chances are they are not the real thing.
Check References – Double check the potential investor’s claims. Request an introduction to two businesses they have invested within the previous year. If they do not have two recent investments, at least find out about the last three companies in which they were involved. Contact the companies by phone or email and do your due diligence. Find out if the investors actually invested and how smooth the transaction went. An investor who does not have three investments is either not serious investors or lack experience. In this case, you’ll have to dig a little deeper to find out if they are legitimate angel investors. Check with known angel investor to see if they are active in their circles. Also, research the prospective investors’ background to see if they are likely to have the resources to cover an investment.
Test Personalities – Once you are assured the angel is legit, make sure they are genuine. Pay attention to the questions they ask about your company. You want to figure out what factors are considered when they invest. Do their interest line up with your objectives? If they ask too many questions about a certain part of your organization beware. You could be giving out sensitive information to someone who is actually interested in taking over your business!
Put it On Paper – You and the angel investor should put your expectations in writing. Discuss the amount of control, if any, the angel investor will have after the money changes hands. You should be able to come to a mutual acceptable agreement and detail both sides of the deal in writing. This will ensure there are no miscommunications and eliminate disappointment down the road.
Some potentials may be put off by these precautionary steps, but they are most likely potential problems. Legitimate angel investors will not be offended. In fact, they will most likely be impressed by your diligence. Have the confidence to run the fakesters away, so you can concentrate on legitimate Angel Investors who will help grow your business.
This article was written for small business owners both new to this and veterans alike.
We are able to pair up small business owners and Angel Investors to help each other make a great business venture. Even if you are unsure you need an investor you are welcome to check our Free Business Plan Template to help you make sure your business is up to par!