Seek first to understand, then to be understood. Good advice overall, but particularly important if you are an entrepreneur seeking funding from an angel investor or VC. There are so many great entrepreneurs that fail in their attempts to acquire funding because they really don’t understand what the investor is looking for. In this article I’ll try to give you a sense for what angel investors are all about, what they are looking for and how to develop your presentation and story-line based on what they want to hear. Note that what an investor wants to hear may very well be different from your normal pitch.
So first, who are angel investors? They come in all shapes, sizes and ages, but generally they are highly successful, financially secure individuals that believe that both their money and their expertise can help an entrepreneur succeed. Angels often have an entrepreneurial and/or senior management background. Angel investors believe that what helped them succeed can be an accelerator in moving entrepreneurs to the next level. Many, but not all of the angel investors are semi-retired; set for life financially, but using the investing and the collaboration with investors and entrepreneurs to stay in the “game”. Other investors and still managing their own companies or working full time and hoping the angel investments will generate future income when they are not drawing a paycheck. Perhaps the biggest takeaway should be that angel investors want to help, want to be of value to the organizations they are investing in and believe that they can personally contribute to the success of the start-ups they invest in.
So what types of investments, what types of companies and what types of entrepreneurs are angel investors looking for? While this will vary from investor to investor, generally these are the types of investments that get angel investors engaged:
- Early stage, but typically not the very first investment–it is expected that friends, family and owners have invested or bootstrapped the company to this point
- The company is in a space the angel investor understands
- A need for $200K to $1.5 million
- Solid leadership team with passion and determination
- Product/service is almost ready to launch
- Preferably some early customers
- Patents have been filed, IP is protected in some way
- Clearly differentiated product
- Market is of sufficient size to support growth projections
- Expected 5 year Compound Annual Growth Rate (CAGR) of over 50 percent
- Expected revenue of $50 million plus within 5 years
These above points represent some of the basics that angel investors look for. Please note that these are general metrics that many angel investors are looking for, but often strengths in one area can offset weaknesses in others. For example, a solid patent portfolio in a high growth area can offset some early weaknesses in the leadership team as long as the management appears to coachable. Any serious red flags in these areas will make it harder to get the attention of angel investors. But, of course, the goal isn’t just to get the attention of investors, it is to get the funding you need with terms you can live with. So, assuming there are no major red flags, how do you maximize the potential of getting angel funding? First there is no magic bullet. There are great companies that never get funded and a lot of companies that shouldn’t get funded, but do. That said, I’ll give you my take on what will increase your odds of getting angel funding.
First and foremost be visible to potential investors. Relentless networking is very important. Don’t just attend an event and put a business card in your file…send an email, ask for some comments or input on your plan, meet the investor for coffee, send an email anytime something interesting happens with respect to your business. I can’t emphasize how important this visibility can be. This can be one of the biggest factors in moving your company from one of a thousand funding applications to actually being considered for funding are the relationships you are able to establish. Go to the networking events. Do your research on angel sources locally. Work the contacts you already have and don’t give up.
Here is a quick case study as to how this can work. Tech Coast Angels (the angel investment group I participate in and the largest angel investment network in the US) periodically puts on a meet the angels event. I participated in one last fall with probably 75 entrepreneurs and about 10 Tech Coast Angel (TCA) members. One of the companies participating peaked the interest of one of our members and this member started to walk him through the process. The CEO of this company also followed up with me and several other TCA members. I probably talked with 15 companies that evening, but with his follow-ups I did remember him and the firm. About a month later the TCA advocate that walked him though the process brought him to a screening meeting with about 50 of our members. The connection he established with the lead investor, with me and probably 5 other members set the stage for the eventual funding of over $1 million.
Second, be coachable. This is a tricky area in that investors are looking for a CEO/leadership team that is decisive, confident and very determined. That said, many of the angel investors have already been where the start-up entrepreneurs are trying to go–building, funding and often-times selling their own companies. Many of the investors I work with have had several successful exits and they are excited about helping others succeed. The CEO that presents himself as arrogant and not needed help probably won’t get help or money from the angels.
Third, be flexible on your pre-money valuation. One of the fasted ways to end an angel investment discussion is to play “chicken” with respect to valuation. While the world revolves around the start-up CEO’s company (from the CEOs perspective), the angel investor commonly sees hundreds of start-ups per year and will ultimately succeed as an investor if they properly manage risk. One of the ways to manage risk is to be very conservative in terms of valuation. Early stage companies, those without large client bases, those entrepreneurs without previous exits, those companies without current product, without patents or protection for their IP will almost certainly get “dinged’ in terms of valuation. I’ve seen several entrepreneurs take this personally and complain that the investors just don’t understand how great this company is. The fact that the entrepreneur is negotiating valuation to me means that the investor does see some potential, but seasoned investors (or entrepreneurs) also understand that there are many risks in start-up companies and the valuation is meant to compensate for some of these risks.
The entrepreneur should also focus on the what the angel investors are looking for…high return exit potential, a management team that the investor would enjoy working with and the ability to actually help the entrepreneur get to the next level. Following the above advice will greatly increase your odds of getting funding. Good luck.