Raising Investor Money
When you’ve reached the point in your entrepreneurial endeavors where you are seriously considering raising investment money, you have several standard options open to you.
You can raise money from your personal funds or Friends and Family; you can go the Angel Investor route; you can arrange a non-equity investment (revenue-based financing) from companies like Lighter Capital if you already have revenue; or, you can go after Venture Capital. The funding option you decide to pursue really depends on your situation and the state of your startup.
This article explores the Angel Investor option and how to pitch to investors, giving you some idea of the path ahead and some of the things you need to be thinking about should you choose to go this route.
Funding Type Definitions
Before we get too far into Angel money and pitching to investors, we need to more clearly define the different options. There is some overlap and typically a bit of confusion around the different major sources of capital. Following is a brief overview defining the different funding types available to you at this stage of your company’s growth.
Friends and Family Money
First is Friends and Family money, which was explained in greater detail back in Part 3 of this series. This also includes any of your own money you invest in your startup. Friends and family is just that, people you have a close personal relationship with. This is not usually a lot of money (unless you have a very wealthy family, in which case congratulations!). Friends and Family money might be as much as $100,000 although $20,000 to $50,000 might be considered typical. The issues around Friends and Family money I will save for a future article.
Angel Money is your second option and is the purpose of this article. An Angel investor is a fully accredited (more on this in a minute) individual that is typically a seasoned businessperson who has an appetite for making investments in early-stage startups.
Keep in mind, different types of funding also require different strategies. For instance, if you’re thinking about how to pitch to investors, your strategy should take into account whether they are angel investors or venture capitalists and cater to them appropriately.
The angel investor is investing their own money, so it tends to be a bit more personal.
While there are examples of startups that have been successful raising just Angel money, the Angel investment is more typically an early round designed to get the company to a stage where a larger venture capital round is feasible. An Angel round is typically in the $50,000 to $500,000 range.
Revenue-based financing is a type of funding in which a company agrees to share a percentage of future revenue with an investor in exchange for capital up front. The loan payments are tied to monthly revenue, going up for strong-revenue months and down for low-revenue months.
While it can be more expensive than a bank loan might be, companies like Lighter Capital that provide this form of financing will typically have far less onerous terms regarding company performance than a bank would have. It’s basically much friendlier money than a bank loan, and the funding company can provide much more help around making your startup successful than a bank can or will. The really great thing about this form of financing is that it doesn’t require you to give up an ownership portion, or equity, in your company like Angel or Venture money will. You can get upwards towards $1 million in growth capital this way, and in as little as four weeks. (Lighter Capital also provides follow-on rounds in as few as three to four business days, up to $4 million.)
Venture Capital is the big money. A venture capital firm is a company that specializes in funding startups. The venture capitalist isn’t, with rare exceptions, investing their own money so it is a little more clinical. Venture firms raise money from Limited Partners which can be anything from wealthy people that don’t want to be angels to institutional funds such as pension funds or mutual funds. You will need to pursue venture capital if your funding needs are in the millions of dollars.
What to Consider When Raising Angel Money
When raising angel money, there are a number of things you will want to consider.
First, raising angel money is not easier than raising venture money, at least not any more. In some ways it might be harder because of the sophistication level of the investor. They are investing their own hard-earned after-tax dollars and will have a whole different attitude regarding handing some of it over to you.
Venture Capitalists are not investing their own money typically. When you pitch to angel investors, you will want to be prepared for a much more personal level of questioning during the diligence process as they are investing in you as much as they are investing in your idea. Venture money tends to be far less personal and more about the company.
Accredited Angel Investors
You must make sure an angel investor is accredited. There is a legal definition of what an accredited investor is. It’s all defined in section 501 of Regulation D as defined by the SEC, so it’s definitely a real thing. You can get the details at ecfr.gov, but basically an accredited investor is an individual with $1M or more in disposable assets, not including their primary residence.
There is a form that needs to be filled out and signed by the potential investor attesting to their qualifications, but unless this is their first angel investment, they are well aware of the requirements and form. If you are working through one of the many angel groups, all the members are almost always accredited investors as a requirement for belonging to the group, but you should make a habit of asking anyway.
This isn’t the time or place to start cutting corners with your business, so be sure to cover all your bases and do some background research of your own on any potential investors when raising angel money. You do not want to raise money from non-accredited investors; it is not a viable or legal source of equity financing.
Once you establish that a potential angel investor is accredited, you want to make sure they are ‘sophisticated’ investors. This is not a legal term, but it is nonetheless a very important one. Simply put, have they done this before?
You don’t really want to be their first unless they are part of a group of investors putting money in. The new investor will typically lack patience and/or understanding of the startup process and unless you really have no other options, it’s probably best they learn somewhere else. In short, no rich doctors. Having a set of ‘newbies’ as investors can also hamper later rounds, a venture firm may not want the headache of dealing with them.
Angel Investor Interests
It’s worth your time to find out why they want to invest in your idea. Often, they will have an interest in your space or they have a ton of experience in related spaces. Many times, the angel investor is someone who has made a ton of money in another startup and wants to continue participating in the small company arena without having to do it themselves.
On the other hand, I have also met angel investors that have made money in their own company and just want to help others do the same. In evaluating their interest it’s important to understand the amount of involvement they are going to want in your endeavor. Be careful here. At one extreme the venture capitalist doesn’t want to hear from you very often, and sometimes only if things are going wrong.
At the other extreme you might find yourself with an angel investor that wants a daily phone call. As with everything there is a balance. The typical angel investor will want to be more involved, you should expect that, but you want to establish that level of involvement up front, not after taking their money.
Depending on the stage of your startup, a weekly status report might be required but monthly is better. You want to be able to make progress between status reports. Also, beware the daily phone call, this is a sign of an impatient or nervous investor, and they are likely going to drive you nuts. Make sure the ground rules and expectations are well defined up front.
Do I Need a Business Plan to Raise Angel Money?
Opinions vary on this question when discussing angel investment. Personally I think you need some form of business plan regardless of whether you are raising money or from which source. The business plan, even at the most basic level, makes you think about what you are trying to do and what it will take to get there.
All that said, I have found that angel investors have less strict requirements around the business plan. While a venture firm might require a detailed analysis of the market and several years of projected revenue and costs, a typical angel investor may not need the extra detail.
Do I Need a Pitch?
What you do need is a great pitch. The pitch is usually a PowerPoint deck version of your business plan and is what you stand in front of a group and present. It’s worth spending a few minutes discussing, because as previously states, how you pitch to investors will vary based on the source of funding and type of investor.
How to Pitch to Investors
There are a lot of generic ‘rules’ about giving a pitch (or any presentation for that matter). They apply here. The worst thing you can do is have a bunch of slides with words in small font, and you stand in front of the group and read the slides. Don’t laugh, this happens all the time. I’ve done it (before I got smacked around for doing it). However, don’t go to the other extreme and have a ton of cute graphics and animation. It’s distracting. I’ve done this too (and got smacked again).
You want to create a presentation that will take less than 20 minutes, which means no more than about 10 slides. Do not use small fonts, and the best presenters don’t even look at the slides, they are just there to guide the audience. Talk to the audience, not to the screen.
Your deck has three distinct sections. First, tell them what you are going to tell them. Second, tell them. Third, tell them what you just told them. In other words, a setup, a pitch and a conclusion.
Keep It Simple
With angel investors you want to keep your pitch really simple. Why? Because for every potential angel investor in the room, there’s another investor not there. You need to avoid the dreaded “You’re going to invest in what?!” question that your potential angel can’t answer in 10 simple words or less. “It’s a particle transformation process that sequences binary proteins in a logical sequence” is far less understandable than a simple explanation of whatever that is that I just said. And no, I have no idea what that is.
Venture capital firms invest in ideas and teams, angel investors invest more in personalities and ideas. When pitching to a potential angel investor or a group of angel investors you want to work really hard on being personable, friendly and engaged. While venture firms will invest in a butt-head with a great idea, angels typically won’t. This doesn’t mean you want to be a standup comic while presenting, but angel investors are looking at you much more personally than a typical venture investor will. Be engaging, a little fun and very professional. A venture investor doesn’t need the fun part.
Angel Investor Groups vs. Individuals
Angel investors tend to come in two flavors: an individual or a group, often referred to as a network or club. While dealing with a single potential investor is very viable, my recommendation would be to work with one of the many angel investor groups out there. There’s a couple of reasons for this advice.
First, the groups tend to screen investors before they can become members. You shouldn’t have to worry about accreditation or ability to write a check. They also like to invest in packs, so you can get a lot of different expertise when taking their money. In most cases you won’t actually be dealing with a whole bunch of different investors and taking 19 calls a day wondering what’s up. I will discuss this more in a minute, but they will usually appoint a lead and you will deal mostly with that one person.
The presentation process is much more organized with angel investor groups and you will usually get to an answer more quickly. You are still dealing with individuals and their own money, so it’s still quite different than pitching to a VC firm, just more organized than pitching to a single individual investor.
How to Find Angel Investors
You can find angel groups online. Here’s a list:
If you want to go the individual investor route, see:
How to Pitch to Angel Investor Groups (and What to Expect)
Finding the angel investor groups isn’t the issue, getting in front of them is. As you can imagine, the better angel groups have a long list of people like you that want to pitch to them. Most investor groups have a similarly structured process for finding startups worthy of their investment, and it’s important to have some general knowledge on what that process looks like, so you can prepare yourself and have a decent idea of what to expect.
Most investor groups will have a prescreening process you have to get through. In the prescreening, you will schedule to give your pitch to a couple of members, kind of like trying out for American Idol. This very small group will listen to your pitch, ask questions and generally assess you and your idea. Then they will either give you a quick answer or get back to you as to whether they think it’s all worth presenting to the entire group.
These groups tend to meet monthly in a lunch setting to hear 3-5 pitches while they eat. The prescreening process goes on all month and the prescreen team might see 50 pitches during that time. You can do the math here. Do not be dismissive about the prescreen team, they are the gatekeepers. Give them your best effort.
So you make it to the big stage. First, there is probably a presentation fee involved. Expect this, it’s how they pay for lunch and other club expenses. You will be one of 4-5 scheduled presenters. You may or may not be invited to hear the others, typically not. You may or may not be invited to lunch, so plan accordingly. You will be presenting to anywhere from 10-40 people in the room, all eating. They will give you their undivided attention, no worries there, but you should assume about half are there just for the lunch.
You will give your 20-minute entertaining and personable pitch followed by questions from the audience. Then you will be invited to leave the room. Depending on the group’s established process you may be invited to leave entirely, and they will get back to you. It’s their process, don’t read anything into it.
The group then discusses your presentation. Some of them may have rules about negative comments, allowing only positive comments. There is then a vote by raising hands as to who is interested in pursuing this further. There is a certain group mentality that occurs here, once a couple of hands go up others will join them.
If the voting process works in your favor, this interested investor group will then appoint a lead; this is the person who will contact you and conduct the process of diligence and valuation. Expect the diligence process to take a month or more.
If nobody raised their hand as being interested, they will let you know quickly. It may not be over, some of the clubs have other chapters and the fact that you made it past the prescreening is important to them. They may invite you to present to the other chapters. There may or may not be an additional presentation fee, and travel is of course on you. If you can afford it, you should take them up on their offer. Sometimes they will give you good feedback from their discussions, listen to this carefully and use it to improve your pitch.
Setting Clear Expectations
During your negotiations with the angel investor groups interested in investing in your idea, make sure you are setting very clear and realistic expectations regarding your startup. Angel investors tend to have a much lower tolerance for missing commitments than venture investors. They will worry more quickly, after all it’s their personal money you are using. They typically have less experience in early investments, and so they may not understand the variables in the process.
When you are selecting your investors, there are certain questions you can ask that may alleviate some of the pressure that missed commitments can create:
Find out how many deals they have done in the past. More experience equals greater understanding of the startup variables.
Have they ever done a second round? Great way to see how deep their pockets are as well as their maturity as an investor.
What is their comfort zone regarding subsequent rounds? You may find angels that simply don’t do second rounds. This is good to know up front.
Who would be on the board? Fewer is better, and make sure you get along with whomever it is. You do not want 12 people on your board.
Lastly, be prepared for the diligence process, this is their chance to really explore you and your idea before they write a check. It may get personal, again this is their money. Be aware, many angel investors have a hard time saying no and may instead just continue to ask questions and kick the tires in what may seem like an endless loop. Set a clear closing date and if necessary, get to “no” as quickly as you can so you aren’t wasting time.
There are great angel investors out there that probably want to invest in you and your idea, you just have to find them.
As you build your business, if you are past the initial prototype, running out of seed funding, and think you are ready to raise a series A round from venture capital investors, check out part 6 of this series in which I address the issues you’ll encounter (and how to overcome them).