angel investors to fund your start-up is not an easy job. Angel investors
have to be enticed into your sales pitch before they agree to finance any business
ordeal. According to David Amis and Howard Stevenson, co-authors of the book, Winning
Angels, The 7 fundamentals of Early Stage Investing, there are several steps
that first-time entrepreneurs must take to win over an angel investor.
- First, you must identify yourself in one of three categories:
- You enjoy owning your company and its financial success. However, you are more concerned
about making sure that your extravagant lifestyle continues rather than creating
the next billion-dollar company. These people are called lifestyle entrepreneurs.
- You absolutely love running your company, as well as witnessing its vast growth
rate. However, you are not interested in selling your business. These people are
called empire builders.
- You enjoy taking risks by expanding your company to the best of your ability, selling
out, or going public. You are very much interested in starting another company and
going through the same process of expansion, selling, and going public. These people
are called serial entrepreneurs.
Many angel investors will agree to finance people who fall into the third category.
- Second, angels are always “sourcing” for new business ventures.
You must identify the appropriate angel benefactor who will fund your start-up.
All angels have the following:
- Contacts. Angels are well known for their networking within the
industry and they can assist you to do the same by locating suppliers, customers,
and employees for you.
- Industry experience. You want an angel investor who has experience
in your line of business and who can give you specific advice regarding your start-up.
- Entrepreneurial experience. Angels who have experience in raising
money for their own companies have more knowledge in the field and can easily point
out the pros and cons of your company. They are also easier to deal with rather
than first-time investors.
- Lots of money. The ideal angel investor has a personal net worth
of $2 million to $50 million. If an angel has more money than that, then the $50,000
your company may need may be obtainable. But if they have less, then you may be
out of luck.
- Business owners should seek to meet angel investors only when their product is truly
ready to be introduced to the market. Preparedness is essential for any meeting
with angel Investors; business entrepreneurs need to open strong and convince angel
investors about their product. In addition, entrepreneurs need to have a clearly
defined vision of their business plan. Once you’ve identified potential
investors, it is crucial that you properly communicate these four areas in your
initial meeting with them:
- People involved in your business. Not only should you discuss
other partners and advisors, BUT you should also mention your management team, so
that they are aware of everyone who has a stake in your company’s success.
- Business opportunity. Communicate your ideas about your potential
customer base, market size, and the timing of the opportunity.
- Your perspective. Discuss external factors that may affect the
overall success of your business. Mention competitors, regulations, available technology,
customer needs, etc.
- The agreement. You should propose the financial deal and its structure.
- Valuation/worth. This term refers to putting a monetary value of
your company. How much is your company worth?What is your financial target and what
is the amount of ownership that you are willing to give up? Angel investors will
price your company accordingly, based on its potential capital return. The
should expect this estimation to be discussed in detail.
- Structuring the deal. This refers to the terms in which angels
invest and their role in the company. Here are three important questions to consider
when dealing with a potential angel investor:
- What type of financing will the angel investors provide? Is it
equity or debt?
- If it is an equity fund, what kind of investment is it?
Is it a common stock, a preferred convertible with various terms, or a convertible
note with various terms? A common stock is the simplest type of
equity investment but provides only a few safeguards to the investor. A preferred
convertible is more complicated but can benefit the investor to a greater
degree. Convertible notes allow no negotiation on price but offer
angels the most protection.
- On what terms? Will the investors get their cash back before the
entrepreneur does? Will the angels have the right to invest in future rounds?
- Negotiation. Your angel investors’s involvement in your business
can be quite complicated. Once angels invest, their role in your company may be
anything from a passive shareholder to a board member. The nice thing about this
financial commitment is that all terms are negotiable, and the best time to negotiate
any deal is to do so before the papers get signed.
Angels tend to focus on the numbers, specifically their initial ownership stake.
They truly believe that will have the greatest impact on the future value of their
investment, so many will firmly bargain over what they feel their rights should
be. They also prefer to take their time during negotiations, not least of all in
the hope that you will eventually come around to their terms. Unless all parties
are aware of how the relationship will work out from the beginning, there is a potential
for continual problems. Business owners need to understand the needs of angel investors
and respect them.
- Closing the deal. Once you and your angel investors agree on the
terms, your business will be financed. But your relationship with the angel investors
does not end yet. There are plenty of responsibilities for both parties. Angel investors
always want to make more money and can help your company move toward "value
events." These events consist of anything that can improve the real or perceived
monetary worth of your company and its chances for success. Examples include signing
deals with strategic partners, lining up venture financing, and landing well-known
Entrepreneurs, on the other hand, should also provide regular updates once a month
to all of their angel investors. Not only does that let the investors know what's
going on, but it also makes them feel as if they are an important part of your company.
Communication, whether written or verbal, is crucial for establishing a healthy
rapport with your investors so that that everyone fully understands their role and
no discrepancies exist.