Attracting Angels
How to attract the right angel investors to your start-up?
If you’re a start-up entrepreneur, you’re likely in one of the most exciting, frantic, and utterly terrifying times of your life. You might feel desperate to prove to yourself (and to everyone else) that you can do this—which might make it difficult to find an objective view about how to fund your new business until it reaches profitability.
If you’re not able to self-fund until this point of profitability, then don’t worry. There are lots of funding options, ranging from friends & family, to banks, business angels, crowdfunding and VCs. Of course, finding what’s right for your business very much depends on your individual circumstances, but please remember that some of these options can bring more than money alone. They might bring relevant experience, contacts, potential customers, new partnerships, or maybe someone to help hold the founding team to account.
But this isn’t an article about funding sources in general. It’s an article about why, for many start-ups, angel investors (individuals or groups who will use their own capital to invest) continue to be a very good option for early-stage funding.
Finding the right angel
Angel investors can live up to their name. They can help provide a relatively instant financial lifeline or can act as a supplement to bootstrapping from personal investment or loans. They can support you, encourage you, challenge you, help you make connections, and think of new opportunities that the management team may not have even considered. But, before you jump on the first offer of cash that comes your way, understand that not every angel investor is angelic.
Equity in exchange for cash alone is the most expensive money a business will ever receive. For an angel investor to be a real business asset, they must not only be a good fit but bring something new and valuable to your business. If an angel investor is interested only in financial return or tax incentives, or they distract the management team with unhelpful questions, or they simply aren’t interested in spending time working with your business, then they’re not the right angel for you.
The best way to find the right angel investor is to kiss a lot of frogs – you have to talk to a lot at angels, to find someone who understands your market and aligns with your values. But where to start? Well, if none of your contacts is springing to mind instantly, then it’s often helpful to start looking through your LinkedIn contacts, and potentially their networks as well. Finding a connection can help to spark an introduction, and most angels would only be too pleased to hear about a new investment opportunity in their area of interest. It’s also worth looking at associations for angel investors. In the UK, the UKBAA (UK Business Angels Association) is a helpful place to research potential angels and find out about events in your area or industry.
For more social or larger networking events, you’ll need to have your 30-second pitch ready and well-rehearsed. Hopefully, this will spark interest in you, your business, and the investment opportunity, and will act as an introduction for a longer, more formal session to discuss your strategy and plans. Don’t be afraid to ask questions about the potential investor’s background and the names of the other businesses in which they have invested. Once a good connection has been formed, then do send a short pitch deck, which should include information about your team, your product/service, your market and competition, your business model, the traction you’ve made to date and your financial plan.
Making it work for everyone
When you work with an angel investor, the relationship must be mutually beneficial. So, before you sign on the dotted line, consider asking these questions from both your viewpoint and the viewpoint of the investor:
Why is this investor the right one for me at this time? Every start-up is unique, and therefore, what you need from an angel investor will be unique. What’s more, what you need right now is different to what you will need in the future. Consider contracting with an investor who’s willing and able to grow with you. Don’t forget to ask potential investors why they believe they can fulfil the needs that your start-up has right now.
How will we ensure a mutual value trade? The investor has to give you more than cash. After all, he or she is taking a priceless share of your blood, sweat and tears. You can’t put a worth on your passion, but you can expect benefits like connections, referrals and expertise to balance the trade. Talk with the investor. Does he or she understand the value equation they are signing up for by investing in your business?
Do we share common values? It’s important that you both share similar values, and that your vision and mission are things the investor believes in. Your purpose, or your “why”, also has to be something the investor subscribes to. This will help you to avoid uncomfortable and potentially costly break-ups later.
How do we intend to communicate? It can be helpful to agree on what access to data an investor will receive, as well as a regular schedule for sending out financial updates. Provide as much detail as useful, along with some commentary about the “why” behind the numbers. Welcome questions, but make sure you can push back if fully answering that particular question might not help the overall growth of the business.
How will decisions be made? Investors do own a portion of the business, but this doesn’t mean that they get to call the shots. Before you proceed with choosing an investor, make sure this is understood. As long as you are remaining true to your vision and values, then as the entrepreneur, you should have the right to make the majority of decisions that you know are best for your business. Before advancing in an investment relationship, ensure that your investor understands your decision-making expectations.
Navigating Due Diligence
Business due diligence is there to make sure that the story told by the entrepreneur stands up to scrutiny. It typically takes place after an investor has heard the pitch and before the investment terms are agreed in any detail.
Jenny Tooth OBE, who is the CEO of the UK Business Angels Association, summarised the angel investors objective for this due diligence phase well in an article for Startups.co.uk:
“The biggest due diligence we investors do is on you. [We look at] what’s on your Facebook and LinkedIn, we ask for references. The biggest thing we go after is you as we put our money and faith in you to execute the business and look after our money.
“What investors don’t like is a lack of transparency. If you have a loan, tell us about it, if you have smashed your credit cards, tell us about this as well. Don’t hide anything when it comes to your financial situation. Do you really have these customers? Do you really have these followers? You need to have evidence to prove this. Honesty is very important.
“If we found out that what you’ve told us isn’t true, then we’re unlikely to proceed.”
The exact nature of the due diligence will vary tremendously by industry, by investment amount, by trading history and of course by angel investor. The primary objective is to mitigate investment risk for the angel investor, and so whilst it will indeed take time, this is an important part for the entrepreneur to navigate successfully.
In conclusion
Raising investment takes time, and it’s not for all businesses. There are a wealth of financing options available for entrepreneurs (even though it doesn’t always seem this way), if, and it’s a big if, they have a credible investment opportunity.
For many start-ups, angel investors continue to be a very good option for early-stage funding, especially when sufficient thought is given to how it can work in practice. Finding the right angel to invest in your business remains the most difficult challenge, but getting this right can unlock enormous benefits beyond finance alone.
