Facebook, Google, Yelp, AirBNB, Square, Twitter and Dropbox were all started with angel investment money. In the book “What Every Angel Investor Wants You to Know,” authors Brian S. Cohen and John Kador provide this staggering statistic: “The US has 250,000 active angel investors who invest $20 billion in 50,000 start-ups every year.” Considering those numbers, you might assume that, since you have a great idea, securing seed capital from an angel investor is easy. But you would be wrong. Based on About.com founder and active angel investor Scott Kurni’s experience, every year “bad presentations kill great companies.” So, if you are an entrepreneur, how do you avoid making this mistake? Simply learn how to pitch an angel.
Do you need a VC or an Angel?
Generally speaking, angels are specialized in seed funding and early start-up stages where the average investment size ranges between $0.4mn to $1mn. On the other hand, VCs tend to be typically involved with growth capital and expansion deals which average between 12 mn and 28mn. However, it is not unusual for VCs in sectors with high business valuations like the tech industry to also get involved in seed funding and early stage, as well.
Guy Kawasaki – a prominent Silicon Valley VC and author of “The Art of the Start”- often reminds start-up entrepreneurs that the VC isn’t their friend and that they are in it only for the money. Therefore, the relationship isn’t based on buying into a vision and a belief in a technology or a product; it’s more about investing in the ability to deliver and execute the exit strategy. By comparison, an angel investor might be more patient, allowing additional time for nurturing and product development.
However, Guy Kawasaki notes that “the most common misconception is that angel investors are easier to sign up than venture capitalists. In fact, they are harder because they’re playing with their own money and they are probably industry experts. By the way, the most dangerous misconception is that angel investors need to make private investments. They don’t. Unlike venture capitalists who must put institutional investors’ money to work, angel investors can just sit on their money or spend it in other ways.”
Furthermore, it is not only about the money or whether it is a VC or an angel. It is also about the expertise, credibility and connections that the investor brings to the table. Guy Kawasaki furthers his point by saying “if they don’t have expertise in your market, then they should have it in a needed function. For example, someone who evangelized a personal computer can probably help a startup evangelize a PDA (hand-held computer).”
Finally, “you should like the person. Don’t dismiss this factor. No matter what the qualifications, if you don’t like the person, it won’t work out.”
How Do Angel Investors Evaluate Start-ups?
So, who are these angel investors and what makes them tick? According to a Harvard Angel Alumni study, angel investors are a unique group and are motivated by:
- high historic returns
- portfolio diversification
- passionate entrepreneurs
- opportunity to mentor, and
The study also identifies specific requirements for being a successful angel. If you are looking for investment money, understanding these requirements can help you craft an effective pitch. These requirements include
- a high tolerance for risk
- a large bank account to withstand losses and reserves for later rounds
- patience; rigorous due diligence
- relevant industry experience, and
- a diversified portfolio
How to Appeal to an Angel
An increase in entrepreneurship means intense competition for funding. To set yourself apart and catch an angel’s attention, you need a compelling pitch. So, how do you differentiate yourself from the competition? Believe it or not, your advantage may come down to how well you present your idea, not on the merits of the idea itself.
In “What Every Angel Investor Wants You to Know,” Cohen and Kador point out that angels want to invest in people who are passionate about their new idea and whose authenticity of belief shines through their presentation. They suggest these tips for delivering an effective pitch:
- Keep it short and focused (no more than 15 minutes) and get the attention of the audience within the first 30 seconds
- Present your business in terms of how it will solve a specific customer problem
- Explain why someone would buy the product
- Give specific and compelling details about the business (avoid generalities), and
- Avoid business jargon and provide good visuals to drive the main points
Angels Invest in People, Especially Women
What kinds of people are attractive to angels? According to Cohen and Kador, the most important qualities are those that reflect strong leadership ability such as good character, integrity, ethical behavior, honesty and trustworthiness.
Angels really like to invest with women. A Dow Jones VentureSource survey showed that when women hold top spots in start-ups, the chance for the company to go public, become profitable and sell for more money than was originally raised, substantially increase. One theory attributes this success to women being better than men at tuning into emotional factors such as branding and teambuilding.
David S. Rose’s 4 steps to successful angel investment funding
David S. Rose offers pitch sessions on a pro bono basis and these sessions quickly developed a reputation as the financial industry’s “best presentation training that money can’t buy.” David (Rose) has a knack for turning and tuning presentations and presenters to show them in their best light.”
The following question was posed to David S. Rose on Quora.com: “How would you break down the process of raising an angel round of investment…?” Here are four steps:
Step # 1: “Understand your business. It sounds obvious, but the majority of entrepreneurs who pitch me have obviously never thought through many of the major issues surrounding their companies. You should know EVERYTHING about your business, product, customers and competition. You should know every metric regarding customer acquisition, conversion and retention.
Step # 2: Understand what investors are looking for, what they usually invest in, and why. There is a vast gulf between a ‘cool product’ and an ‘investable company’ and if you don’t understand the difference, you will be doomed before you start.
Step # 3: ONLY after you’ve completed #1 and #2 will you then be ready for capital to be applied to your venture. And that capital is going to come from…YOU. That’s right, you should not even consider trying to raise money from anyone else until you have reached deep into your own pocket.
Step # 3a: … in the real world most startups at this point turn to friends and family for additional capital, in the form of equity or loans, to help get the company to a stage at which it is legitimately investable by third parties.
Step # 4: Start preparing the components you will use to support your pitch to outside investors. These range from outbound materials, such as pitch emails and funding applications, to presentations of your venture in different forms for different purposes, to detailed back-up information that you will be asked to supply during due diligence.”