Lately, I’ve seen many conversations on how to raise early funds for your startup. If you have at the very least a working prototype, and have exhausted your friends and family network, you might consider moving on to the possibility of an angel investor.
What is an angel investor?
Angel investors are focused on helping startups take their first steps, but they are not philanthropists. They will only put their money where they feel confident that the business will be successful.
What’s the difference between an angel and a VC?
Angels usually invest small amounts at a very early stage. They’re not looking for a 20x return on their investment like venture capitalists, or VCs, are often keen to see. VCs, however, are taking much bigger bets on behalf of their Limited Partners (or LPs). As a result they are looking for much higher returns, with the risk spread across a larger group of people or institutions.
What do angels look for in a founder?
Most angels look to take a hands-on approach in helping entrepreneurs, which will play a big role in who they invest in. They want the relationship to be mutually beneficial, so make sure to show them the winning side of both your personality and your business so they can see the chemistry.
“I need to feel comfortable with and trust the entrepreneur from the start. I always tell founders that trust must be there from the get go. It’s a long term relationship, so what’s the point of working with someone if there isn’t trust?” Liron Petrushka, serial entrepreneur and investor in over 27 companies with 13 exits, said.
How do you find angels?
That’s the million dollar question, isn’t it? Some angels answer cold emails, while others don’t. Angel investor, Joanne Wilson, sources most of her investments right through her inbox and she graciously manages to answer each one personally.
Many investors see the connection that entrepreneurs make with them as part of the quest, and how you get to them wins you points.
Who should you get an introduction from?
Start with a trusted, mutual advisor in your network. Or, try another investor in their network that you might not be a good fit for due to stage, sweet spot, competing portfolio company, etc. There must be a good reason why they aren’t investing in you or else it could raise eyebrows and bring up the question, “Why should I invest in you if they aren’t?” This individual might be able to provide a solid recommendation.
The best type is an intro from a founder they’ve already invested in. Try to seek out and make friends with those already established founders. Get advice, establish relationships, ask for mentoring, let them become your advisor and then, hopefully a referrer to their investors. Look for people in your alumni network, and intros through friends. Yes, entrepreneurs are busy people, but they were once in your shoes and probably got help from more experienced entrepreneurs. Hopefully you’ll find one or two with a “pay-it-forward” spirit.
Do investor research before you pitch
Before you start sending out messages or asking for introductions, get to know your potential investors . The easiest way? Review the investor’s LinkedIn page, blog and website.
“Make a target list of investors that invest in your vertical/stage. Understand what they look for, who else is in their portfolio. Keep a spreadsheet to track all interactions. If you get a no, find out why and track that — it could be crucial info to get them back in for next round,” Sapna Shah, entrepreneur and angel investor with Red Giraffe Advisors, suggests.
And most importantly, make sure you don’t have any direct competitors in their portfolio. This can lead to some very awkward situations. They won’t invest in you and might end up getting some crucial information about you to pass on to their portfolio company.
Whether you are cold emailing or receiving an introduction, it’s imperative to know who you are reaching out to.
“I often get cold emails from founders, which is fine with me. I can tell that many of them have actually gone to my website and learned more about me (and referenced this in their email), but still start the email with ‘Dear Mr. Shah.’ It’s pretty clear from my bio/photo that I’m not a Mr. This makes me much less likely to consider the startup as a potential investment. If you can’t research me before reaching out, why would I think you’ve researched and thought through your startup well enough?” Shah said.
Have your investment materials primed and ready
Before you start, be prepared with an investor deck, as well as an abbreviated version that you can send out before a meeting. This summarized version is not your full deck, but five to eight essential slides to provide as a teaser . You don’t want to give away everything, but you do want to intrigue potential investors enough to see that they need a meeting with you.
Always be prepared for both a “yes” or a “no,” but realize that if an investor does like you, they’ll want to see due diligence materials, so have them ready to send right away.
“Be as ready as possible so the process goes quickly and smoothly. Have your deck ready to go, and also a blurb, an executive summary, a realistic and well thought out financial model, description of your technical architecture (if necessary), team bios, any IP/contracts, etc.,” Shah said.
I recently spoke to an LA based investor who asked to remain anonymous, who told me that they were doing due diligence on a company for $1.5M, and after a month and a half, when the team couldn’t get a proper deck with the important materials to them, they passed. Don’t let that happen to you.
There are many factors to securing an angel investment, including chemistry, timing, a killer team, a great product and more. The more prepared you are for the entire process, the better your chances of landing a successful meeting will be.
“Raise the right amount, talk to the people you know for a fact would be interested in your space. Try to raise money in a short period of time – get out and meet as many people as possible in that time. Don’t take months. Be bold! Don’t waste your time trying to convince an investor,” Wilson said. “If they are not interested, move on to the next one.”