I caught up on some reading over the weekend. Not as much as I would have liked because I had to help my wife around the house on Mother’s Day. Mostly I was taking notes on all the help that our two kids gave her. Father’s Day is coming and I’m ready to compare and contrast the amount of love and support the kids gave her as compared to what I’ll get. Of course, I’m only expecting about half as much since my wife is twice the parent I am…even with one arm metaphorically tied behind her back (technically it is in a cast and sling). Nevertheless, I got a little reading done, including Martin Zwilling’s piece on 5 things every entrepreneur about seeking and finding angel investors.
I excerpted the five points below…and embellished a bit to provide some additional depth.
- Angels invest in people, more often than they invest in ideas.That means they need to know you, or someone they trust who does know you (warm introduction). For maximum credibility, start networking for potential investors to build relationships a few months before you start asking for money.They also favor entrepreneurs who are experienced in starting a company, and experienced in the business domain of the startup. Your business model may be very attractive, but if you are new to this game, you may not be fundable. In this case you need a partner who has deep domain knowledge and a track record of building businesses. TechonomicMan says: This means that you need to have a non-confidential executive summary of a couple of pages in length that you can distribute. All those service providers (attorneys, accountants, consultants, etc.) who want to help you…LET THEM! They frequently have connections to investors, even though they’re not investors themselves. Develop relationships. Nurture them by being responsive. Friends, Family and Angels invest based signficantly on your character –the difference is that Angels need to get to know your character while Friends and Family already know and love you!
- A complete business plan is always required. Maybe friends and family will give you money with no plan, but angel investors expect a real plan. All professional investors know that entrepreneurs who start a business without a written plan almost always fail. Don’t forget to clearly outline the problem you are solving, before you give the details of your solution. Clearly spell out your business model and your exit strategy, so investors will know how you will make money, and how and when they will get their return. TechonomicMan says: Your plan needs to be readable! As in #1 above, the founder needs to have deep subject matter expertise in the market and the business plan will reveal that. Know whether or not you are a good writer…and have the humility to ask people to read your plan for content, structure and grammar and spelling. Do NOT use one of those “fill in the blanks” software packages to write your plan. My preference is still for a prose-written plan rather than a powerpoint version as your official plan although customs are changing in that regard. Either way, 30 pages, including financial projections, is a fairly long plan.
- Angels like to get involved directly with the team. This means they are generally only interested in local opportunities. It won’t help your case or your workload to do an email blast and follow-up with 60,000 investors around the world. If there is no one in your area interested or experienced in your type of business, you may have to move to Silicon Valley or Boston, or wherever the right angels for your domain congregate.A related issue is the size of the investment you need. Angel investors tend to limit the size of individual investments to $250K or less, and even in groups they rarely consider requests for more than one million dollars. If you need more, you need to focus on venture capital territory. TechonomicMan says: If you have a chance to be choosy, choose Angels who have experience that you do not have. Know your weaknesses and find people who can fill them. Much of the hard stuff about being a successful entrepreneur is intangible…relationships that you have, knack for selling, negotiating ability…whatever. If your business needs to produce thousands of widgets a month and you’ve never managed a production environment, get someone who has. Angels increasingly behave like VC’s. That is they tend to take closer to 6 months to make an investment than 3 months. Be aware of this when you start.
- Financial projections and opportunity in the right ballpark.Investors won’t fund people who don’t push the limits, or inversely won’t recognize business realities. Here are some rules of thumb. Your fifth-year revenue projections better be between $20M-$100M. Smaller numbers mean a low return, and larger ones aren’t usually credibleSecondly, you need a large and growing market, to offset the huge risk of funding a startup. Rules of thumb include an opportunity projection that exceeds a billion dollars, with at least double-digit growth. Smaller numbers may easily make a viable business, but won’t attract investors. TechnomicMan says: Know your exit opportunities that relate to that revenue number. Experienced angels know that the longer it takes to hit the 5 year projections, know that it may take more money than is anticipated today to survive to that time. This leads to the potential for taking later money that hurts the position of early-in angels. Your knowledge about comparable types of companies and what their exit multiples were like, may give you some extra credibility with angels who are concerned about being crushed by later punitive rounds of capital.
- Business domain and your character must be squeaky clean.Certain business sectors have historical high failure rates and are routinely avoided by investors. These include food service, retail, consulting, work at home, and telemarketing. Also, don’t expect investor enthusiasm for your gambling site, porn site, gaming, or debt collection business.Angel investors are people too. They expect you to understand their motivation, respect their time, and show your integrity in all actions. They probably won’t respond well to high pressure sales tactics, information overload, or bribes. TechonomicMan says: Exactly!
Apologies to Martin Zwilling if he disagrees with TechonomicMan. Let me know if you have any feedback, or experiences of your own with Angels.