Angel investors are still the lifeblood of early-stage startups, despite the surge of activity in crowdfunding and an increasing early interest from venture capitalists. According to the Angel Capital Association, at least 300,000 people have made angel investments in the last two years, totaling $24 billion in the U.S. alone. These are all accredited investors who risk their own money.
As an active angel investor myself, I understand how the process works, and I see the disappointment in the eyes of entrepreneurs who approach angel groups for funding and often get turned away for not being timely or prepared in the minds of potential investors. In the interest of getting you off on the right foot, here is my priority list of recommended preparation activities.
- Come with a product built and a proven business model. Contrary to a popular myth, angels don’t fund dreams. They expect to see at least a prototype solution, funded from your own resources, or friends and family or a grant. Angels are most interested to help you scale the business, once you have real customer traction and ready to break out.
- Assemble a team with the requisite expertise and experience. It takes more than one person, no matter how passionate, to grow an investible business. A business needs technical, marketing, financial and many other skills. If you are an inventor, for example, you need to line up the business side of your team before angels will be interested.
- Create and highlight your intellectual property portfolio. If your solution and brand are really new and innovative, you need to protect them with a patent, trademark or trade secret. These are required to show that you have a defensible competitive advantage or at least a barrier to entry. Investors are not interested in “me too” businesses.
- Prepare an executive summary and investor presentation. Angel investors expect to review a short executive summary before booking time to hear an investor presentation or taking the time to analyze a full business plan. Remember that angel investors are buying equity in your business, so they are not impressed with a customer presentation.
- Have a full business plan and financial model to close the deal. These may not be required, but they will help convince an investor that you have a real plan to execute and understand the variables that affect every business. The business plan should address all key questions, including valuation, funding needed, use of funds and exit strategy.
- Formalize the business structure before asking for funding. The excuse of waiting to incorporate to see what investors prefer will get you passed over quickly. Most viable startups are set up as C-corporations or Limited Liability Corporations, either of which can be done quickly and cheaply by the entrepreneur. Simplicity is preferred at this stage.
- Highlight existing presence on the Internet and social media. In today’s world, if your startup is not visible on the Internet, you haven’t started yet. Startups in stealth mode can’t get feedback from real customers and can’t be perceived as experts in their industry. In addition, your company and social media names are key intellectual property.
- Build a relationship with one or more investors before asking for money. Asking angel groups for money before knowing anyone in the group is not recommended. Investors are people too, and they expect new entrepreneurs to be visible in industry conferences, talks with peer investors as advisors or simply exploring investor interests.
Doing all these things won’t guarantee you an angel investor, but it will put you in the top few percent of startups seriously considered. Don’t be one of the 90 percent of startups now passed over quickly. Also, later when you need a larger round of venture capital, the same preparation will serve you just as well, so you might as well learn now how to fly with the angels.