If you’re looking to raise money, especially if yours is a business with high-growth potential, angels are a good bet. Such private investors contribute almost as much in total dollars to startups than venture capitalists, and in considerably more companies.
At the same time, however, most angels’ own holdings have taken a hit in the economic downturn Plus, many are tending to investments they already made or financing more-established ventures. Last year, 35 percent of angel investments were in seed stage companies, a decrease of 10 percent from 2008, according to the Center for Venture Research.
Trouble is, the more angels you strike out with, the less likely you’ll succeed elsewhere. “If you’re perceived as a ‘shopped deal,’ angels won’t be as interested in you,” says James Gershwiler, managing director of CommonAngels, an angel group in Lexington, Mass. “It begins to look like you’re not fundable. And no investor wants something that can’t raise money.”
The upshot: If you’re hitting up angels, either individually or through an organized group, it’s more important than ever to do the job right. Here are some common mistakes to avoid:
Approaching investors who are the wrong fit.
If your company doesn’t jibe with the angel’s investment strategy and business goals, you don’t stand a chance. “One person may like a business that generates steady cash flow, while another is looking for the next Google,” says Gershwiler. “That means two very different types of companies.” His group, for example, focuses on software and Internet-related businesses. What’s more, to be considered, software companies have to be in beta stage or have a working prototype. “If you’re outside of those boundaries, it’s very unlikely well consider you,” he says.
Better move: If you’re approaching an angel group, check out the website. Most will include their investment strategy. Or, do some digging on your own. If necessary, email and ask directly for their parameters. But, don’t make a pitch unless you’re certain you’re a match. Remember: most angels look for companies with the potential for high returns and rapid growth. But that can be through, say, an acquisition strategy, not just sales of a hot technology.
Misunderstanding the angel’s typical role.
Most angels are looking for more than an investment. They’re interested in a partnership, through which they get involved with the business. They’ll sit on your board and, probably, expect to be in on key decisions. But many entrepreneurs only want someone who’ll hand over a big check and agree to a high valuation. “There’s a mismatch of expectations,” says Edward Rogoff, professor of management at Barcuh College’s Zicklin School of Management.
Better move: For one thing, being able to tap angels’ expertise is one of the key benefits of raising money from them. So, learn to embrace it. Meaning: From the get-go, think of ways to make the most of that opportunity. At the same time, try to pinpoint just how involved the angel wants to be, so there are no surprises. “Some angels want to be actively in on things on a weekly basis, others will be more hands-off,” says Rogoff.
When deciding whom to approach, also look for the person likely to be a better long-term partner. In fact, Gershwiler recommends choosing someone offering less-advantageous terms and a track record for being a good collaborator than another angel with a better deal, but a reputation for high handedness. Such a choice most likely will also be helpful when you seek your next round of financing.
Ultimately, should you decide you really only want a check, you’ll have to turn down the money if you think too many strings are attached.
Emphasizing the wrong points in your pitch.
Whether you’re presenting to a group or an individual, there’s some crucial information you need to include—and that entrepreneurs often leave out. Most important is the valuation you’re looking for and how you’ll protect angels from further dilution of their investment in further rounds, along with an exit strategy.
Better move: Make sure to address these issues head-on, before they ask you—or tune out. And, while you’re at it, keep the pitch short. “Companies tend to get lost in the details,” says Greg Huey, managing director of Alliance of Angels, an angel group in Seattle.