What are five key steps in obtaining angel investment?
As a repeat technology entrepreneur, I sit down at least once a week with someone who is looking to raise funding for their business idea. In the last 10 years, I’ve collected so many war stories that I like to pass them on to those just starting out in hopes of giving them a head start. In my last company, I raised about $8 million in capital, $5 million of that from angel investors. I’ve successfully started the process again for my new company Pixability.com.
Here are the five most important things I learned from all those years of fundraising:
A. The Basics: You need to do your homework first. There are plenty of websites and books to help you get there but this is the output you need to start your conversations with serious angel investors:
- Executive summary clearly outlining the customer pain and your solution along with what differentiates you (yes, it will change as you go along, that’s no excuse for not doing it now)
- Investor presentation deck (10-15 slides are enough)
- Financials
- A team (doesn’t need to be complete yet)
- At least 1 customer
B. You’re in Sales Now: Selling your company to investors is pretty much like any other business-to-business sales job with a long sales cycle. I didn’t understand this until my last company was profitable. At that point the board of directors told me: “You’ve sold the company to us, now go sell our product.” They promptly made me head of mobile sales.
Most importantly, don’t expect money right away. Ask for advice first. Especially with angels, funding is about relationships.
Ok, now you say: “I don’t know anybody rich enough to invest.” YES YOU DO! The average check an angel investor writes with a first investment is $25,000 or less. Many people you know have enough money to be able to afford a $25k check.
I don’t come from a wealthy family, was straight out of graduate school and I didn’t have any connections when I started. When I finished we had the former CEO of Sony Europe, the Chairman of IKEA, the most successful retail store investor in Switzerland and many more as investors or board members.
The key is to find early investors that other investors look up to and follow. So think hard about who could be interested in your venture and why. Find angels that share your background. They might share your industry expertise, come from your region, your college or share your ethnic background. A lot of angels invest for more than the money – they may like to hang out with your other investors, or they may want to keep a foothold in the industry they’ve retired from. Or plainly: they may just like YOU.
Always remember the golden rule of sales: It’s a numbers game. Don’t take rejection personally; go on to the next potential investor.
C. Spoon-Feed Them: You’ve found an interested investor, congratulations! Now they write the check, right? Not so quick, you’ve got more work to do. Spoon-feed these investors with information as you make progress:
- Give regular updates on technology development and breakthroughs
- Show them happy customer reviews
- Give them a chance to get to know you and your team
You can leverage good news into investment money: for instance, at my last company one of the first deals we got was outfitting the Mercedes Benz S-Class with our technology. This was a project with very high prestige but small numbers. Our investors loved it: we collected at least $1 million on the news of a deal that only got us approximately $200k in revenue (not even up front, but several years down the line).
One important caveat: always be honest, don’t make things seem prettier than they are. It will come back and bite you.
D. Listen: Experienced angel investors have seen hundreds if not thousands of deals. You need to profit from that by doing one thing that entrepreneurs often neglect: Listening. Experienced investors are good pattern matchers. Chances are, they’ve seen a deal similar to yours. They may not know your industry like you do but they have seen what factors make a start-up likely to sink or swim. It’s great free advice if you listen closely.
I’m not advocating that you meet with Joe Angel, take all of his feedback and re-write your business plan completely. Treat the feedback as a data point and collect more data points. If it all points in the same direction think hard about changing your business.
If you still think all of the feedback is wrong: prove it. Nothing shuts up doubters like paying customers and lots of them!
E. Step by Step: You’ve invested your own cash, borrowed some from Aunt Emmy and subsequently received your first check from an outside investor. Hooray! With those three steps you’ve now crossed a threshold that will allow you to climb the next steps towards more financing. Here are the rungs of the investment ladder (you can skip one or two if you’re lucky):
- Your own money and time (“sweat equity”) first
- Friends and family
- Individual angels
- Angel groups
- Super angels (very wealthy individuals that will invest $500k plus in one venture)
- Venture capital
- Venture debt (loans that help pay for equipment to stretch your cash)
- Mezzanine (money that bridges your way to a likely public offering)
- IPO
You may be reluctant to risk your own money but think from an angel investor’s perspective: “Why should I give my hard-earned money to someone that isn’t willing to risk his own or his family’s?” It doesn’t have to be your life savings but it has to be enough that it’s painful for you to walk away. The same applies to your co-founders.
So: be persistent and go out there to find more money to make your vision happen. Understand that raising more money will take you much more time that you anticipate. Good luck!
Bettina Hein is CEO and founder of Pixability (link to http://www.pixability.com). Pixability helps entrepreneurs and small businesses tell their story with video and win more customers in the process. Bettina also co-founded Swiss-based speech technology specialist SVOX AG and led the venture-backed software company to profitability. In 1996, Bettina was the initiator of the START (http://startglobal.org), which encourages entrepreneurship among university students. Bettina frequently speaks on the topic of entrepreneurship. You can learn more about Bettina on LinkedIn (http://www.linkedin.com/in/bettinahein) or follow her on twitter (http://twitter.com/pixability).
So you’re an entrepreneur (or an aspiring one). You have a vision to start a business that involves a potentially killer product and a load of ambition, and if you’re anything like my fellow HubSpot founder Dharmesh Shah and I were when our idea for HubSpot was forming, you’re hopeful and extremely excited to get started. But hey – money is an issue. You’re a startup, so chances are the company bank account is nothing to brag about.
