Five Tips for Wooing Angel Investors
Without a doubt, the most common question among new and inexperienced entrepreneurs is, “How do I obtain funding for my business venture?” It’s an eternal problem: entrepreneurs complain that investors are unwilling to take a chance, while the venture capitalists complain there are no ideas worthy of investing in, and both sides have a point. There are way too many ill-conceived, inadequately researched business plans that are slapped together and which are a waste of investors’ time, but it’s also true that over the last decade venture capitalists have shifted their funding to less risky, later-stage ventures with shorter time horizons.
This preference for funding later-stage ventures isn’t going to go away any time soon, and so it’s important for entrepreneurs who are seeking early-stage equity financing to consider approaching angel investors instead. Sometimes referred to as the “invisible venture capital market,” angels are high-net-worth individuals or small private equity firms who are generally experienced entrepreneurs themselves. They enjoy helping the next generation and getting in on the ground floor of a new business, but don’t be fooled into thinking that their investments are charity. While angel investors have a greater tolerance for risk than most, they’re still hoping to see a return on their invested capital, and convincing one to fund your new venture requires a solid business idea and presentation. When it’s time to make your pitch, here are five tips to keep in mind:
• Communicate your business idea clearly-You’d be surprised how many requests for funding are turned down because the investor simply didn’t understand the value proposition. In some cases this is because the idea is outside of the investor’s domain of expertise; even more so than venture capital firms, angels tend to invest within industries that they know and understand. In other cases there is no value proposition, but more often than not, the entrepreneur simply fails to communicate the core business idea clearly and effectively. Just because the idea makes sense to you, don’t assume it will make sense to others. Distilling an idea down to its essence and pitching it effectively takes thought and planning.
• Make sure your plan is realistic-In surveys, one of the leading reasons business plans aren’t funded is because the investors they were pitched to didn’t consider them to be realistic, specifically in terms of the time and money required to establish a consistent cash flow and revenue stream. Inexperienced entrepreneurs often ask for as little money as possible, because they’re afraid that if they ask for too much they’ll be turned down. This is counter-productive, because it sends the message that the entrepreneur is overconfident and unrealistic. When launching a business, everything takes twice as long and costs twice as much as you think it will, so plan accordingly.
• Do a true competitive analysis-It’s amazing how many entrepreneurs claim that there are no current competitors in their field. That’s almost never true, and even in the rare case where your product is truly revolutionary, there’s always an existing product that’s at least a partial substitute. Take the time to research and show that you understand the competitive landscape. Point out your competitors’ weaknesses, but also acknowledge their strengths and explain what will give your product a sustainable competitive advantage.
• Pitch both the product and the management team-It’s often said that investors invest in people more than in ideas, and there’s a fair bit of truth to that, especially when it comes to angel investors. They don’t have the same resources available to do due diligence as a venture capital firm, so angels need to feel comfortable and have confidence in both you and your management team. Don’t lie or misrepresent your team’s experience; be honest about your strengths and weaknesses, and if you yourself are inexperienced, make sure you have some seasoned professionals on your team as well.
• Practice, practice, practice-As a result of the Sarbanes-Oxley Act, there are restrictions on what you can present in the written business plan, particularly concerning your financial projections. That has made the verbal presentation more important than ever before, so you should practice your presentation for as many other business people as you can and gather feedback. Learn what needs clarifying, where your presentation is boring, and what you can do to make it more compelling. You need craft a persuasive story that is both concise and complete, with just the right amount of sizzle and just the right amount of steak.
Remember, angel investors are busy people, so don’t waste their time. Once the initial small talk is over, cut to the chase and be clear and up front about what your business idea is and what you’re asking for. If you come across as realistic and professional, with a clear plan and a polished presentation, you’ll be several steps ahead of the pack, and that much closer to successfully wooing an investor and obtaining the capital you need.