Ten
Tips to Appeal to Angel Investors
- You
should understand that private equity is a class of investment, and
that most early stage entrepreneurs are better suited for investment
from private investors ("angels"), than from professional
venture capital partnerships.
- You
should create a business plan that emphasizes your sustainable competitive
advantage.
- You
should accept the fact that having "a good idea" is often
not enough to raise capital from private investors, and you should do
your homework to provide "proof of concept" for your venture.
- You
should understand that raising capital requires an expenditure of capital.
- You
should identify and contact angels who are suitable for you.
- You
should recognize that industry experience is valuable and important
to angel investors.
- You
should recognize that raising capital takes time.
- You
should recognize that angels are "value-added investors."
- You
should never stop looking for additional angel investors until all checks
from interested parties have cleared the bank.
- You
should invest your own money in your venture.
- You
should understand that private equity is a class of investment, and
that most early stage entrepreneurs are better suited for investment
from private investors ("angels"), then from professional venture capital
partnerships. (top
of page)
In the early 1980s, before federal laws allowed institutional pension
funds to invest in venture-capital funds, venture capital looked
more like angel capital does today. It was early-stage, high-risk
capital. A typical venture capital fund might have had $4 million,
and its managers would consider individual investments of $500,000
to $1.5 million.
In response to the influx of pension fund money, many venture capital
funds have grown to a size of $100 million to $200 million. They
are looking at sectors like information technology and health care
for larger investments, in later-stage companies, that have the
potential to generate $100 million in revenues.
The median venture capital deal today is about $7 million, and only
3600 early-stage companies received funding from approximately 500
venture capital funds in 1999, according to the National Venture
Capital Association.
By contrast, according to the SBA, 250,000 or so angels in this
country invest about $30 billion annually, most of it in seed, start-up
and early stage ventures. The early-stage entrepreneur thus has
an increased probability of raising funds from angel investors,
then from professional venture capital partnerships.
- You
should create a business plan that emphasizes your sustainable competitive
advantage. (top
of page)
It is very rarely that an entrepreneur raises capital from private
investors without clearly defining the competitive landscape of
his business and how his solution has a clear competitive advantage
beyond others in the market. Investors will want to know the "barriers
to entry" for your venture Ñ namely, how you will keep competitors
from being in the same exact business. Some barriers to entry might
include: patents, trade secrets and proprietary technological development
or solution.
- You
should accept the fact that having "a good idea" is often not enough
to raise capital from private investors, and you should do your homework
to provide "proof of concept" for your venture. (top
of page)
In the investing world it is well known that good ideas are abundant
and well-done execution is rare. As such, you recognize that an
idea alone does not create success.
The existence of a prototype or working model of your business'
product or service can greatly increase your chances of attracting
angel investors Ñ the prototype phase of your business should be
financed by yourself, friends, and family.
Angels are impressed when you have lined up potential customers
who are willing to test or sample your product and also commit to
purchase it, should it solve their problems.
An entrepreneur who can demonstrate that he can create paying customers
in the real world is far ahead in terms of raising from angels than
the entrepreneur who simply has a business plan and an idea.
- You
should accept the fact that raising capital requires an expenditure
of capital. (top
of page)
If you have decided to raise capital for your venture, you will
increase your chances for success if you hire professionals to assist
you with the process. This requires budgeting for professional help,
as well as the actual process of creating and mailing business plans,
travel, telephone and FedEx.
It is unrealistic to assume that professionals will work only on
a "back-end success fee," getting paid only when you obtain funding,
and that they will accept your stock in lieu of cash.
Early in the development of your business, your stock has no value
and is illiquid. Professional advisors, who might be providing you
with consulting, legal, accounting and investor introduction services,
are paid for their professional efforts. They have businesses to
run themselves, and those businesses require cash in order to provide
you with the assistance you need. They should not be assumed to
be "partners" in your venture Ñ without the 50% stock ownership
Ñ who will assume your risk of success or failure.
- You
should identify and contact angels who are suitable for you. (top
of page)
If you have decided that angel investors are appropriate, try to
focus on those who can help you. Angel investors will not have the
financial resources to invest in all companies that approach them.
Professional service firms and/or angel networks that work with
private investors can assist you in the screening and selection
process.
Angels have various investment criteria:
Deal size: Angel investors, being individuals, tend to know the
investment size with which they are comfortable. The entrepreneur
should not be surprised to find that most angels invest anywhere
from $25,000 to $250,000, with a few occasionally beyond those levels.
Thus, "syndication of angels" is a common process for those entrepreneurs,
needing to raise capital, beyond the individual range of most angels.
Company stage: Some angels will only invest in seed or start-up
companies, while others seek later stage ventures looking for expansion
capital. The entrepreneur and their professional advisor should
look to find those angels whom are well-suited to the stage of development
of the venture.
Industry: Angels tend to invest in businesses they either know and/or
can readily understand. Many angels, having previously been successful
entrepreneurs, will tend to lean toward their prior industry experience.
A deal well-matched toward its prospective angel investors will
have a higher probability of a successful closing.
- You
should recognize that industry experience is valuable and important
to angel investors. (top
of page)
A "rule of thumb" in the investing world is that a business is more
likely to succeed if you at least have 1 or 2 parties experienced
in the industry area you are pursuing, so that the skills of the
angel investor become an "adjunct" to your team.
Unlike venture capitalists, angel investors do not give as much
weight to whether you have been involved with successful startups
before, or experienced successful venture capital deals before,
or were a high-level executive of a large corporation during your
career.
Angel investors want to see that you understand your industry and
your business and have had some relevant experience. They are willing
to invest in a person who has not been in a startup business before
because, more often than not, they themselves were once startup
entrepreneurs with no previous business experience.
- You
should recognize that raising capital takes time. (top
of page)
A common question is: How long will it take me to raise money?
An appropriate answer is: Longer than you think.
Raising capital is a time-consuming process. It is not unusual for
a startup entrepreneur to spend 50%-70% of his time raising capital
from angel investors, a process that can last on average for 3-6
months.
During that time, angel investors will ask numerous detailed questions
as part of their due diligence process and will raise objections
in regard to your market, marketing strategy, technology, operations,
or competitive landscape.
Your ability to clearly answer these questions and handle the objections
will be crucial to your ability to raise capital.
- You
should recognize that angels are "value-added investors." (top
of page)
Most angels see themselves as "value-added investors," meaning that
they derive as much personal satisfaction from helping a new business
owner as they do from contributing capital to the venture. Many
were previously successful business owners.
Angels bring with them "value added" benefits including: (1) prior
industry experience (2) valuable knowledge about business itself
(3) their ability to mentor (4) creative ideas (5) contacts for
your business.
Value angels well beyond their financial contribution and will they
will be even more likely to assist you in ways you had never imagined.
- You
should never stop looking for additional angel investors until all checks
from interested parties have cleared the bank. (top
of page)
Raising capital is a marketing and selling process.
All good salespeople know that in order to make their numbers, they
must have plenty of prospective customers in their "sales funnel,"
as only a few will come out as real paying customers, when all is
said and done.
Likewise, all good salespeople know that a customer is not really
a customer until his check has cleared the bank.
Entrepreneurs who are raising capital should approach it as a marketing
and selling process, whereby they work numerous qualified (3 to
4 times) the number of prospective investors they need to raise
their round. Searching for additional prospective investors should
never stop until all the required funding has been raised, and cleared,
in the bank. Otherwise, the Entrepreneur will likely fall short
of his capital raising goals.
- You
should invest your own money in your venture. (top
of page)
If you want to start a business, be prepared to invest your own
money.
Entrepreneurs who expect investors to risk their money in their
venture, should also place at least 20% of their own net worth in
their business. Those entrepreneurs who are not willing to assume
such risk are not considered serious entrepreneurs by the investment
community, and will most likely not receive any funding.
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