Every new startup I know dreams of being touched by an angel investor. Yet according to the latest data from Angelsoft, only about 1 out of 100 companies who initiate the formal request process actually get funded.
The Angelsoft 2008 Deal Funnel indicates is that 75% of the interested companies never make it past the initial screening process. More than half of the remaining group are eliminated during live presentations and discussions, and another 10% are eliminated during due diligence.
What is this daunting process, and what can you do to optimize your chances of surviving it? Over the past 10 years, I have had the opportunity to see how the process works, several times from the startup side, and more recently from the Angel perspective (as a member of an Angel group Selection Committee).
Before you can understand how to make the process work for you, you need to understand a couple of even more basic questions - Who are Angel investors, and what do Angels really want?
Angels are typically high net-worth individuals who invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally-managed fund. What they really want is to contribute to the success of an emerging company with all the right attributes, along the following priority lines:
- The management team is strong, balanced, and experienced.
- The market the company serves is already large and has great growth potential.
- The technology/product/service meets a compelling need in the marketplace.
- The company seems to have a defensible competitive advantage.
- The business plan is complete and executable by the management team.
- The valuation for investment purposes is reasonable and defensible.
- The potential rate of return is exciting.
So what should you do to prepare for this stage in your venture, and optimize your chances of making it through the process? Here is my list of Ten Top Action Items to best prepare you for success in achieving a funding event with Angels:
- Incorporate the business and finalize your plan
If you expect to require external funding, you should plan to incorporate as an S-Corp, C-Corp, or LLC, rather than the more expeditious sole proprietorship or partnership. The corporate entity lends itself best to the concept of "sharing" equity required by investors.
- Line up an experienced team of founders, executives, and advisors
Remember the old adage that "investors fund people, not ideas." That's why this item is so important, and is probably the biggest stumbling block I see in getting through the initial Angel screening.
- Reserve your Internet domain name and roll out a web site
In today's world, if you don't have a web site up and running, you will not be perceived as a real company. Investors routinely go to candidate web sites to get a feel for the tone and scope of the company, as well as its maturity and offerings.
- File a patent and trademarks to define and protect your intellectual property
Having a defensible competitive advance or "barrier to entry" is another critical step to funding, and another common stumbling block during all phases of the funding process.
- Build a prototype product that you can demonstrate
A frustrating conundrum for many entrepreneurs is that they need money from investors to design and build a prototype product, yet most Angel investors expect to see at least a prototype before they invest.
- Find that initial customer who is willing to pay real money for your product or service
This is really an even stronger extension of the previous point. All the conviction and market research in the world are no substitute for real customers paying real money. This is called "validating the business model."
- Build an Executive Presentation and Executive Summary
All most Angels want to see for their initial screening is a one or two page Executive Summary sheet, similar to the "glossy" marketing collateral sheets that most companies prepare for new product announcements to customers. Remember to aim the content of this summary at investors, not customers. It must contain your "elevator pitch" to investors, as well as key points from the Executive Presentation, the Business Plan, and the Financial Model.
- Document the Business Plan
Every entrepreneur and new business should document their Business Plan, whether they intend to seek investor funding or not. As a Founder, you may think that everyone understands your vision and plan from your passion and words, but it doesn't work that way. Write it down, so that even your most intimate business associates, as well as interested investors, have no confusion on the roadmap ahead.
- Finalize your Financial Model
Like the Business Plan, a Financial Model is required as much for your own use as to impress Angel investors. In most cases, an interactive Microsoft Excel spreadsheet is adequate, with projection formulas for revenue, costs, and cash flow over the next five years.
- Network to the maximum with investors and investor connections
The last and possibly most important action item I can leave you with is to build relationships with investors and friends of investors BEFORE you need their help in building your company.
In summary, being touched by an Angel can lead you to your dreams of a new and successful business, but it doesn't often happen without planning, hard work, many pitches. Don't expect anyone to swoop down and wave a magic wand.
(See Marty's Web site: Startupprofessionals.com)