Posted by Early Growth
May 22, 2014 | 5-minute read (847 words)
Hopefully you caught our webinar on attracting angel investors. In case you missed it, here’s the download and my quick rundown of the main points.
In order to attract angel funding, you have to think like investors do. First off, who are angel investors? They’re mostly self-made individuals who typically invest in early stage companies on a part-time basis. And what are they looking for? Mainly they’re in search of cool ideas that address a market gap and will return 5-10 times their initial investment.
So how can you be successful at scoring angel funding? First, make sure you can distill your idea into a 2 minute elevator pitch. Next, work on getting exposure. Think of it as a funnel. Leverage your extended network to get introductions to at least 100- 250 investors. If you meet with 50-100 of those, you’ll likely be following up with 25-75, go through due diligence with 25-50; and in a position to be offered funds by 8-15. Whew!
Clearly, this needs to be a full-time job (a good reason to have a cofounder so one of you can stay focused on building traction and executing on your milestones). Speaking of milestones, you should be setting these for 12-18 months out. And definitely build in a “fudge factor” as a contingency.
Angel questions. While you’re working on funding, potential investors will be scrutinizing you to figure out what kind of commitment you and your cofounder(s) have shown. They’ll want to know how long you’ve been doing this. And how much money you’ve raised from friends and family. Savvy ones will also want to know:
- Do you and any co-founders like each other?
- Can you sell: not just your product, but your idea?
- How are you building your team?
- Who else are you talking to?
- And who are your competitors?
While everyone likes to think these are straight business decisions, of course intangibles like “do they identify with you?" or "is there chemistry?” always play a part.
Making the Pitch.
Once you’ve got meetings set up, make sure you’ve prepared answers to standard due diligence questions and you’ve done some dry runs with your pitch deck. To really nail it, your first page should tell a story in 30 to 60 seconds.
Your goal is to get investors excited and emotionally connected. Your second page should provide a solution. Next outline your market size and explain how you are you going to make money, before going over the competition, your IP, and your team. You need to be able to do this in 10-12 slides max
with supporting documents, e.g., financial projections, and other details in an appendix.
Your best approach with financial projections is to combine top down with bottom up analysis. And really hone in on your addressable market and your business’ niche within it. Outline your overall spending picture including what you’ll do with the funding, cash burn, and your salary spend. Factor in reasonable salaries for yourself and any co-founders, but make sure to be open and upfront about them!
Valuations: Who sets them? What’s the range? And why do they differ between regions?
Entrepreneurs can ask for the valuation they want (supported by comparables), but ultimately investors control this. Just as with VCs, talking to several angels gives you more options as to which number to go with. Keep in mind that hitting milestones makes a big impact -- and can give you a step change in valuation for the next round.
In the Bay Area, $3 million tends to be the norm for early stage valuations.
But this does differ across geographical locations mainly because, as with real estate, valuations mostly reflect local supply and demand. Investors still tend to invest locally, use local comparables, and base valuations on prior investments.
Think you’re finished once the funds hit your bank account? You aren’t!
Investors’ biggest complaint is writing checks, then not hearing from the entrepreneur again until he or she is trying to raise the next round. Think long-term: keep your investors updated and always follow-up (even with those who turned you down initially).
Questions about angel funding? Tell us in the comments section below or contact Early Growth Financial Services for help and support.
Deepak Gupta is Managing Director of seedchange which brings innovative startups to serious investors. Seedchange finds companies with passionate founders and groundbreaking products in high-growth markets and presents them to investors on its online platform. Deepak is also an advisor and mentor at 500 Startups and Vegas TechFund.
Sirk Roh brings more than 25 years of experience, including 17 years in leadership roles with high-tech companies, to his position as COO for Early Growth Financial Services. His areas of expertise include debt and equity financings, planning/budgeting, financial analysis, cash flow management, high growth management, and cost reductions/rightsizing.