Monday, August 12, 2013

Learn From the 5 Core Principles of Angel Investors

power-of-angel-investingIf your startup is looking for an Angel investor, does it makes sense to present your plan to flocks of Angels, and assume that at least one will swoop down and scoop you up? In reality, hitting large numbers of Angels in multiple locations with a generic pitch is one of the least productive approaches.

Here are five key things you need to know to quickly find the right Angel for your startup:

  1. 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.

  2. 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.

  3. 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 all eight million accredited investors in the US. 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.

  4. 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 credible

    Secondly, 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.

  5. 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.

If you do get rejected the first time, don’t give up, and don’t expect a simple answer on your rejection reason from most Angels. They will probably tell you to come back later, after you have finished the product, signed up a few customers, or reached some other future milestone. This is called “not burning any bridges,” in case you start to show traction and they want back in the deal.

Yet if follow the recommendations above, there is definitely hope, even when the economy is not booming. According to a recent article on The Wefunder Blog, the U.S. has at least 256,000 active Angels who collectively invest some $21 billion a year (more then all venture capital sources combined) in new businesses. All you need is one.

Marty Zwilling


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