No matter how unique or groundbreaking your idea is, it isn’t always easy to find investors for startup companies, because there are thousands of ideas chasing a smaller pool of investors. Even if you are just starting, you probably know that banks and traditional sources of funds are not usually open to the idea of investing in a startup. It is highly probable that your best source of funds will be angel financing for entrepreneurs.
How Angel Investing Works
If you don’t know where to find an investor, you can find many on the Internet. Many websites function as a “hangout” or clearinghouse for angel investors, startup companies and people looking for a job at a startup. On these sites, you can see who has money to invest and a history of investing in companies like yours, and you can even make initial contact. You should also look at the websites of angel investors that have a presence in your industry so you can get an idea of their current portfolios.
When you accept money from an angel investor, you will more than likely be required to give up part ownership of your company. In addition, angel investors often want a seat on the board, and they will expect to have a major say in your company’s strategy. In fact, although they may allow you to retain majority ownership, they will usually structure the financing deal so that they have controlling interest. If this is a problem for you, angel investing might not be a good choice.
Angel investors may be looking at your product to round out their existing portfolios, and they may consider merging your company with another company in which they have an interest. It’s important that you have a clear understanding of the investor’s motivation, rather than simply focusing on the cash influx. If your goals are not aligned with the investor’s vision, you might be better off looking elsewhere. Be sure you have legal representation during the negotiations as well. Many naïve founders focus on retaining majority ownership without realizing that they have given up control of the company in exchange, through complex equity structures.
Unlike a standard business loan, angel investors are often looking for two additional things in return for their financing. They want an idea with the possibility of offering an above-average return, and they want an exit plan in place before they will invest.
If you’re hoping to find a business investor for a startup, you have to do everything you can to convince the investor that your idea is a moneymaker so you stand out from the competition. Don’t approach an angel investor until you have a solid market strategy and an exit plan in place.
How to Attract and Land an Angel Investor
When you set out to find investors for startup business funding, you should get more than just an influx of cash. Many successful and well-known angel investors recommend that you seek angels who want to use their expertise as well as their cash to make your startup successful.
This is an often-overlooked aspect of the benefit that can accrue when you find investors for startup business ventures. If you had to hire the expertise that an angel investor brings to the table, it would probably be cost prohibitive. Angel investors also have deep networks, and they can connect you with people it might be impossible to meet on your own. These connections can prove invaluable when it comes to creating business plans, doing market research, or even creating prototypes of your product.
Since an angel investor is going to want an ownership stake and a say in the business strategy, your first step should be to clarify your objectives. Knowing your ideal situation and how far you can deviate from the ideal to obtain the cash will be critical during negotiations. If you wait until you are in the middle of negotiating to make these decisions, you are likely to let your desire for the money color your viewpoint.
Your second step should be to surround yourself with a strong management team. Look for people who have strengths in areas where you don’t, so that you have a balanced team. Find people who are as smart and as strong as you are — perhaps even stronger. Noted angel investor Marc Andreessen has been known to say he invests in people, not products. Angel investors look at the team because they know that good people will always find a way to succeed. Weak people allow their egos to get in the way of success or teamwork, and that can spell doom for a startup and the angel’s capital.
Do your market research. You must know exactly who your target market is and why your product is better than anything else available. Even if your product is completely new, never approach a venture capitalist with the statement that you have no competition. If people have a problem that your idea can solve, they must be solving it somehow without your product. Know the answer as to who or what you will be competing with.
Along with knowing the competition, know your market size and your addressable market.
- How many people or companies have the problem you are solving?
- How much are they spending to resolve it?
- What is the revenue of your key competitors?
- How much of their market is addressable with your product?
If you can create detailed target personas, all the better. It shows you really know your market.
You also need a complete business plan. If you don’t know how to create a viable business plan, hire someone to help you. It will be well worth the investment. Have the person you hire review the plan with you until you know it by heart. You should memorize all the facts and figures without referring to your notes, and you should know what every line in the plan means.
Don’t forget to include your exit plan in the documents you prepare for the angels you will approach. Know when you expect to provide a return to the investor, whether that comes from an IPO, an acquisition or even a payback. Just be aware that angels are usually looking for a return much higher than standard interest rates, so it may be impossible to pay them back without an IPO or acquisition.
You should also know how much money you need, and a clear plan for how you will use the money. Many first-time founders blow the investment on fancy launch parties and costly office space. Angel investors try to avoid this type of founder. Show the investor that you respect his/her money by creating a thoughtful and reasonable spending plan.
You must also have an elevator pitch to catch the interest of the angel investors you approach. The pitch should be no more than two or three sentences. The first sentence should state exactly what you do, and the rest should be about the benefits you bring and why your product is unlike anything currently in the market. If you can’t do that in three sentences, keep rewriting until you can. That is all the time you will have to capture the investor’s interest. Even if your meeting goes on for a lot longer than that, the decision will likely have been made during that opening statement. Don’t blow it with buzzwords and marketing terminology. Be clear and direct.
Why You Need a Prototype to Land an Angel
Andreessen has often said that he only invests in strong teams, so you need to ensure that you have done everything possible to show the strength of your idea and your company. Don’t attempt to sell the investor with words. Show him/her exactly what you’re bringing to the table that deserves his/her time, attention and money.
One of the best things you can do to help the angel investor understand your product is to bring a prototype. With a prototype he/she can see right away exactly what the product does. A good prototype may help you cover any rough spots in your elevator pitch or your presentation. It can help to capture the imagination and prove that you are willing to take the extra steps to earn the investment you seek.
Working with a firm that specializes in rapid prototyping and injection molding helps you to meet a need that many people have — they have to see something before they understand how it works. Additive manufacturing or 3-D printing is an emerging technology that can also help you by fabricating a prototype that helps provide a proof point for your idea. Although some entrepreneurs skip this step, they often have a harder time making their idea come to life in the mind of prospective investors. Creating a prototype is a minimal investment for a founder, and the investment pays off when you land your angel investor.