Early-stage investors focus primarily on backing great teams. Angels will examine your team members’ complementary skills, out-of-the-box thinking, and mental flexibility to pivot whenever needed. Ultimately, they must trust the business owner to make the difficult day-to-day decisions. If the angel has a positive history with a serial entrepreneur, it’s not uncommon for her to write a cheque before ever hearing their new business idea. However, what type of angel would you want to have as an equity owner in your company?
WHO DO I CHOOSE
It matters greatly who invests the initial capital in your company. As an early stage entrepreneur, you’re walking around with a tin cup asking for money. A well-known angel investor or a credible angel syndicate can validate your deal and positively influence who notices your company next.
However, receiving dollars at the early stages of a capital raise is helpful to jumpstart fundraising traction. Investors want to see strong numbers before they’ll talk to you, and low profile investors are often the people who help provide the traction that brings in well-respected names later.
It’s important to attract a lead or anchor investor who will set the terms of the deal. If she has the requisite credibility, then others will immediately follow without wanting to renegotiate the original deal terms. Additionally, choose an angel who is willing to do convertible debt instead of equity. It’s faster, cheaper ($5,000 using standard legal documents versus $20,000 on average), and provides more flexibility in your first round of funding. She must be fair on valuation asking for no more than 15% of the company in the angel round. Make sure the angel doesn’t want a board seat, requests no voting rights, and won’t micromanage your operations and next round of financing. Remember, the success of each round becomes the platform upon which you’ll launch your next round of funding.
An engaged investor base will help with introductions, referrals, and advice
A word of warning. Don’t allow venture capital (VC) firms to invest in your angel round. If a VC decides not to make a follow-on investment, a negative credibility signal will be sent to the marketplace. Any amount below $1million would be considered a small percentage of a VC’s overall fund and they will consider this investment into your business an experiment that may or may not be continued.
APPROACHING AND PITCHING THE ANGEL INVESTOR
When pitching an angel investor, state your business quickly and succinctly. Use bullet points in your email to indicate what you want (call to action), status of the current capital raise, how much money has been raised and who the investors are, the upcoming milestones, and your team. Demonstrate your sales traction and how you plan to get revenues up 5-10x. Your data will communicate that you’re a desirable investment; never use over-the-top superlatives.
Mark Suster, partner at Upfront Ventures in LA, has on average 35,000 emails sitting in his inbox. The average venture capitalist reads a pitch deck in under 4 minutes. He won’t take more than 30 seconds to read an email. Make sure yours stands out.
If you get no response, then be persistent and send your follow up email 3-4 days later. If there’s still no response, ping them again a few days later with the same email.
Success! The angel replied to your email. Now what? When responding to emails, the same day is the norm. In fact, the more important the person, the sooner you want to respond. Anything beyond 24 hours could be misinterpreted as disinterest. A same day answer signals that you’re on top of things and that the sender is important to you.
WHO COMES ALONG ON THE PITCH?
Fundraising is one of the few things the business owner or CEO can’t outsource. Hunter Walk, partner at seed stage VC firm Homebrew, explains: “You don’t need an intermediary. You need to be out there building relationships with potential investors. You need to understand how to tell your story, to get someone to believe in you. Failure to do this well doesn’t just impact fundraising – your hiring, PR, and partnership development will also suffer. So, founders, please send the email directly to me – preferably with a link to a product demo instead of a 60-page business plan.“
When your company has grown significantly and capital raising becomes more complex, only then is it recommended to hire an investment banker and advisors. Until then, you are the only person who can get yourself financed.
YOUR MINDSET WHEN RAISING MONEY
Elizabeth Yin, a partner at 500 Startups (a small business accelerator) has developed the following guideline for raising capital: 5-100-500. Over 5 weeks, meet with 100 investors to raise $500,000 in your first angel or seed level round.
She suggests to engage in 100 meetings to hone your pitch, and find the right investors that are interested in your space and vision. This translates into 4 meetings per day, 5 days a week, for 5 weeks traveling around to different cities and countries. This requires a lot of planning, countless introductions, and an immense amount of your valuable time.
Putting a 5-week time limit on the raise highlights 3 necessities: the urgency to close, the coordination of funding offers, and the boundaries for running your business.
Firstly, 5 weeks creates urgency. Investors must believe if they don’t invest now they won’t be able to get in at the same price later. An investor will make you her top priority if your deal is going to close tomorrow. Be warned, the time scarcity you communicate to investors must be authentic or you’ll lose your credibility and all likelihood of being funded.
Secondly, timing. You should aim to receive all offers, usually in the form of term sheets, during the same 1 to 2-week period. By receiving multiple offers simultaneously, you gain leverage and pricing power to close the deal quickly in your favour.
Thirdly, boundaries. Raising your needed funds in 1-2 months is an ideal scenario. If you haven’t raised the funds after 5 weeks, you need to stop fundraising and work on building more value in the company to make it more attractive. Although fundraising is an ongoing process of building long term relationships, be mindful it doesn’t continue ad infinitum. As the business owner, you’ll be in a constant struggle to work on the business while raising money.
YOUR FIRST MEETING WITH AN ANGEL
Start your meeting well by always arriving 5-10 minutes early. This signals to the investor that you’re organised and respect his time. Being on time is so important at Andreessen Horowitz, a $4B venture capital firm, that it charges its staff $10 per minute if they’re late for a meeting with entrepreneurs. Again, give yourself the best opportunity possible for success by arriving early.
During meetings, entrepreneurs generally talk too much. They’re nervous and love to talk about their company. Instead listen and ask questions. In fact, after 2 minutes ask for the investor’s initial reaction and build a 2-way conversation. Your goal is to find a match. If you do, great, continue. Otherwise, use your remaining time to get feedback on the pitch and ask for referrals. Don’t wait until there’s 2 minutes left of the meeting to find out the investor is not interested and waste the opportunity for feedback.
Ask questions such as:
1. Now that you know my company what milestones should I reach before an investor would be excited about it?
2. Who should my next hire be?
3. Who else should I be talking to or meeting with?
4. What would you suggest I do when I get stuck?
As you close the meeting, draft next steps with the investor. Discuss a clear timetable to follow up with the angel and create a joint template to reference in future conversations. If the agreed upon path isn’t being followed anymore, ask what has changed. Always be persistent in maintaining engagement. Keep referring to your template, but also give them the opportunity to opt out.
Before you leave the meeting, understand what level of return on investment (ROI) the investor is seeking. Then design your funding needs, desired exit and work backwards towards an investment proposal. You’re looking to collaborate on your inflection points and milestones, how you’ll spend the funds, and your business model.
It matters greatly who invests the initial capital in your company
Once you’ve had your first conversation with an investor, follow these steps to lead them to the close. Firstly, ask to keep the investor on your private VIP email list. You’ll be sending out monthly updates about your company to remind them of your progress. These updates will not only include milestones for your company, but also valuable insights into your industry and your competitors so you are at the same time adding value to your investors and their portfolio of companies.
Next, have an abundance mentality and open your network to them. If you’re generous with your assets and connections, more will appear.
When you’re ready to close, get all your angels into 1 room, physical or virtual. Your aim is to close the deal during that meeting. Help them to move fast by offering concessions, such as a lower valuation using warrants or a slightly higher equity stake. Do whatever you can to close the round quickly so you can get back to running your business.
Become known as someone with whom investors want to work. An engaged investor base will help with introductions, referrals, and advice. Have a disciplined management reporting approach and you’ll differentiate yourself from most other entrepreneurs. Your goal is to have each one invest in your next financing round.
Your 1-page monthly report could look like this:
1. Start with the bad news and end with the good news. Warren Buffet starts his annual shareholder report by admitting his mistakes for the year. He disarms the negative impact of any bad news by letting others know he’s aware of the mistakes and will fix them immediately. This gives his investors’ confidence in the rest of the updates he provides.
2. Remind them of your previous targets and state whether they were reached.
3. Share exciting news like product releases, big deals signed, new hires made, editorials published, and news articles about you or your company
4. Share monthly and quarterly financials and core
KPIs, and then give context around the good and bad of those numbers. If you can, provide actual versus budget comparisons.
5. Share strategic objectives to help them understand where you’re going and the challenges you are and will face.
6. Ask for help if you need it. They want you to succeed.
INVESTOR DUE DILIGENCE
Once you’ve accepted the investor’s offer, prepare for their due diligence process to start and make it as easy as possible for them. Put together a virtual ‘data room’ or ‘deal’ room and keep it updated. Your accountant should already have a lot of the data stored to facilitate your annual audit (if you have one). Use Dropbox or upgrade to Light-Serve to allow an angel to access your ‘data room’. Here are the contents that I recommend: general company data, financial information, corporate agreements, IP rights and product information, legal documents, insurance coverage, litigation history, employee and HR information, tax filings and documents, marketing and sales information, and current fundraising information.
Having this information prepared in advance shows transparency, professionalism, organisation, and insight into what investors need.
“All’s well that begins well”. As you raise your first round of financing, remember that the angel investor, seed fund or any alternative source of funding you choose, will lay the foundation to attract your next group of investors for your Series A capital raise. At this level, venture capitalists step in and will expect you to raise between $3-10million.