Angel investors invest in early stage or start-up companies in exchange for an equity ownership interest and this is a fast growing trend with global success stories like Uber, WhatsApp and Facebook .
How much do angel investors invest in a company?Globally, a typical angel investment is $25,000 to $100,000 in a company but can go higher. Locally it can start as small as Rs 500,000.
The six most important things for angel investors:
- Quality, passion, commitment, and integrity of the founders.
- Market opportunity and the potential to become big.
- A well thought out business plan.
- Interesting technology or intellectual property.
- An appropriate valuation with reasonable terms.
- Aviability of raising additional rounds of financing in case progress is made.
What angel investors want to see initially from an entrepreneur:
- A clear elevator pitch for the business.
- An executive summary.
- A prototype or working model of the proposed product or service (or at least renditions).
- Early adopters or customers.
How long will it take?It will always take longer than you expect, and it will be more difficult than you had hoped. Not only do you have to find the right investors who are interested in your sector, but you have to go through meetings, due diligence, negotiations on terms, and more. Raising capital can be a very time-consuming process.
Financial questions to anticipate from angel investors:
- How much capital are you raising?
- How long will that capital last?
- What will be your monthly burn rate?
- Do you have detailed financial projections for the next two years?
- What are the key assumptions underlying your projections?
- What key cost components are there for the product or service?
- What are the unit economics?
- What are the likely gross margins?
Questions about marketing and customer acquisition:The investor will want to get a sense of how the company plans to market itself, the cost of acquiring a customer, and the long-term value of a customer. So the entrepreneur should be prepared for the following:
How does the company market or plan to market its products or services?
- What is the company’s PR strategy?
- What is the company’s social media strategy?
- What is the cost of a customer acquisition?
- What is the projected lifetime value of a customer?
- What advertising will you be doing?
- What is the typical sales cycle between initial customer contact and closing of a sale?
Questions about the management team and founders:
- Who are the founders and key team members?
- What relevant domain experience does the team have?
- What key additions to the team are needed in the short term?
- Why is the team uniquely capable to execute the company’s business plan?
- How many employees do you have?
- What motivates the founders?
- How do you plan to scale the team in the next 12 months?
How risky is angel investing?It’s very risky, and an angel will only invest if he or she is comfortable with potentially losing all of his or her investment. At best, only one in ten startups are successful.
How can you find angel investors?
- There are a variety of ways including through:
- Entrepreneurs, lawyers and accountants
- Angel investor networks (groups that aggregate individual investors)
- Venture capitalists and investment bankers
- Crowdfunding sites
- The best way to find an angel investor is a solid introduction from a colleague or friend of an angel. The use of LinkedIn to ascertain connections can prove useful.
Will angel investors sign nondisclosure agreements?No. Angel investors see too many deals and you don’t want to impose a roadblock to getting an investor interested in your company. The entrepreneur will have to be careful and not disclose highly confidential information.
What should a CEO ask of potential angel investors?The entrepreneur should determine whether a prospective angel investor will be a good fit for them. Here are questions often asked:
- Can you refer me to other entrepreneurs you have worked with?
- How do you like to help your portfolio companies?
- What amount of follow-on investment do you think our company will need to succeed?
- What are your relationships with venture capitalists who would fund our next round?
- How do you think you can be helpful to us in growing the business?
- How do you like to interact with your portfolio companies?
- What are your other investments in our space?
Key factors to determine appropriate valuation in a seed round of financing:
- Ultimately, valuation is determined by negotiations, but the key factors will include:
- Experience and past success of the team
- Market conditions
- Competitive environment
- Market opportunity
- Amount to be invested and resulting dilution to the founders
- The value add expected to be brought by the investor
- Market comparables
- Potential for a big exitEmail introduction from an entrepreneur:
- Tell them how you got to them – was it ideally a referral from a trusted colleague or friend?
- Short bullet points within the email about what your company does, what problem it’s addressing, and any early traction it’s getting.
- Show the founders to be competent, experienced, and passionate.
- Attach a 2- to 3-page executive summary
How often should updates be given to the angel investors?It’s best to give monthly updates to your angel investors, whether you have good or bad news. If you are having issues, this can be a way to seek help or advice. And if you need extra investment, this might facilitate a discussion. No one likes to be surprised, so regular communication is important.
Reasons angel investors will reject an investment:
- The market opportunity or potential size of the business is perceived as too small.
- The founders don’t come across as knowledgeable or passionate.
- The sector that the start-up operates in is not of interest to the investor.
- The pitch was made by the entrepreneur through a blind email and not a referral from a trusted colleague of the angel investor.
- The financial projections were not believable and the founders couldn’t convince the investor of the reasonableness of the underlying assumptions.
- The company was based too far away from the angel investor.
- The investor wasn’t convinced of the need for your product or service.
- The investor was not convinced that your company was going to differentiate itself from competitors.
Mistakes made by entrepreneurs in a pitch meeting with angel investors:
- Not showing why the market opportunity is key
- Bringing your team to the pitch meeting, but only having the CEO speak
- Saying you don’t have any competition
- Showing uninteresting or unrealistic projections
- Taking too long in your presentation
- Not doing a demo
- Not being able to explain the key assumptions in your projections
- Not being able to articulate why your product or technology is differentiated from a competitor
- Not being able to tell how you will use the investment capital and how long it will last
- Not knowing your potential customers and what they are thinking
What should an entrepreneur do to prepare for a pitch meeting?
- Review the investor’s LinkedIn profile and website.
- See if you have any common connections on LinkedIn and ask those connections for insight or advice.
- Practice your pitch in front of an audience that will give you honest feedback.
- Review what portfolio companies the investor has invested in.
- Be prepared to be interrupted.
- Be prepared to answer difficult questions like “What do you think is the appropriate pre-money valuation for your company?”
- Revise and refine your PowerPoint deck. Keep it under 20 slides.
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