How to Raise Capital from Angel Investors.
Angel investors invest in early stage or start-up companies in exchange for an equity ownership interest. The stereotype of an angel investor is someone who is a hardened business entrepreneur who has amassed great wealth but is always ready to earn more. Angel investing in start-ups has been accelerating with many high-profile success stories that have spurred angel investors to make multiple bets with the hopes of getting outsized returns. Many angel investors may not be as wealthy as you think but they are financially savvy. Most are looking for a way to grow their money by promoting innovative new business.
Angel investors fill a gap that exists between the venture capitalist and the commercial lender. Venture capitalists and financial institutions lend larger amounts with the former willing to accept high risk and the latter expecting minimized risk. Many angel investors invest smaller amounts of money, $20,000 instead of $200,000, but there are no limits so $500,000 up to $1million is possible. They don’t want to play an active role in the business, but do have business savvy.
Angel investors are also groups of people who pool their money to fund startup businesses. They include investment clubs, professional groups like doctors or lawyers and even other entrepreneurs. The reason there is a bit of mystery surrounding angel investors is simply because they keep a low profile, so are difficult to categorize. What you do know is that they are financially savvy, thorough in their evaluation of businesses and hopeful of earning a high return on their investments. So don’t stereotype angel investors because they can be anyone. Learn More
Important things angel investors LOOK for in a company?
- The quality, passion and integrity of the founders.
- The market opportunity being addressed and the potential for the company to become very big.
- A clearly thought out business plan, and any early evidence of obtaining traction toward the plan.
- Interesting technology or intellectual property.
- An appropriate valuation with reasonable terms.
Questions entrepreneurs should anticipate from angel investors?
- How much capital are you raising?
- How long will that capital last?
- Do you have detailed financial projections for the next two years?
- What are the key assumptions underlying your projections?
- What are the likely gross margins?
The angel investor will want to get a sense of how the company plans to market itself, the cost of acquiring a customer, and the long-term value of a customer, management. So the entrepreneur should be prepared for the following:
- How does the company market or plan to market its products or services?
- What is the company’s PR strategy? You can find help for this question at: OTC PR Group
- What is the company’s social media strategy?
- What is the projected lifetime value of a customer?
- What advertising will you be doing?
- Who are the founders and key team members?
- What relevant domain experience does the team have?
- What key additions to the team are needed in the short term?
- Why is the team uniquely capable to execute the company’s business plan?
- How many employees do you have?
- What motivates the founders?
Raising capital can be a very time-consuming process and it will always take longer to raise angel financing than you expect.
Not only do you have to find the right investors who are interested in your sector you have to go through meetings, due diligence, negotiations on terms, and more. There are a variety of ways to find angel investors, including through:
- Angel investor networks (groups that aggregate individual investors)
- Venture capitalists and investment bankers
- Crowdfunding sites like Kickstarter and Indiegogo
After finding investors you should determine whether a prospective angel is a good fit for your company, questions you should ask:
- How do you like to help your portfolio companies?
- What amount of follow-on investment do you think our company will need to succeed?
- How do you think you can be helpful to us in growing the business?
- How do you like to interact with your portfolio companies?
Angels will often invest in the company through a convertible note. They key terms negotiated are:
- Unsecured or secured on the assets of the company – this is almost always unsecured.
- Interest rate and payment – the interest is usually accrued and not paid currently.
- Discount rate – this is the discount rate the investors enjoy for taking the early risk in the company, expressed as a discount from the company’s Series A round of financing. A discount rate of 20 percent is typical.
- Valuation cap – this is the maximum valuation of the company where the note can be converted in the next round of financing.
There are many reasons an angel investor will reject your pitch.
In fact, the great majority of prospective investors are likely to reject you. Here are some of the typical reasons for rejection:
- The market opportunity or potential size of the business is perceived as too small.
- The founders don’t come across as knowledgeable or passionate.
- The entrepreneur through a blind email and not a referral made the pitch from a trusted colleague of the angel investor.
- The financial projections were not believable and the founders couldn’t convince the investor of the reasonableness of the underlying assumptions.
- The investor wasn’t convinced of the need for your product or service.
- The investor was not convinced that your company was going to differentiate itself from competitors.
- Bringing your team to the pitch meeting, but only having the CEO speak
- Showing me uninteresting or unrealistic projections
- Taking too long in your presentation
- Not doing a demo
- Not being able to explain the key assumptions in your projections
- Not being able to articulate why your product or technology is differentiated from a competitor
- Not being able to tell me how you will use my investment capital and how long it will last
What benefits can an entrepreneur get by taking on an angel investor?
Other than money, some or all of these benefits are obtainable from good angel investors such as contacts to venture capitalists and strategic partners. Advice and counsel along with credibility by being associated with the investor. Also contacts to potential customers, employees, lawyers, banks, accountants, and investment bankers, the lists goes on and suffice to say more than enough reason to make a go at it and raise needed capital.
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