You've taken the plunge and started your own business of some kind. And maybe you can now see what it can really grow into. But you just don't have the money to make it happen and you've already blown through what you borrowed from your parents and friends. Where else can you turn? Well, you might consider angel investors—folks with capital, often successful entrepreneurs themselves, who look for ways to invest in growing companies. But where do you find these so-called angels? And what exactly are they looking for? In other words, what do you need to do to pitch an angel investor?
Chris Arndt is a partner in Red Granite, a Chicago-based firm that advises high-net-worth individuals and families—a roster of clients that includes several angel investors. From his unique advisory position, Arndt says he knows what entrepreneurs should be thinking about as they go about trying to get an angel on their side. What follows, then, are his tips to do just that.
1. Update your business plan before contacting an angel. “The key here is to be realistic,” says Arndt. “Angel investors are smart and will immediately dismiss your pitch if the numbers don’t add up. That means you’ll need to show a solid understanding of your target market (you have one right?) by knowing its total size. Then use reasonable estimates to back into your expected market share. Multiply this expected market share by your expected selling price to determine your total revenue. Then multiply this total revenue by your gross profit margin to establish your profit before overhead expenses.”
You’ll also need to clearly list all assumptions you use. “This way the potential angel investor can determine if he agrees or disagrees with your assumptions,” says Arndt. “Make your projections easy to manipulate so you can build a few ‘what-if’ scenarios with different assumptions. You will make a great impression if you can show solid profits even with conservative market share estimates.”
2. Understand how much capital you are seeking from the angel investor. “Don’t just say ‘two hundred thousand dollars’ because it’s a nice round number, Arndt, says. “Use your business plan to show that your cash burn rate is $20,000 and that you expect to break-even in 10 months. That’s why you’re requesting $200,000.”
3. Find someone in your field using AngelList. “AngelList allows you to search for angel investors in certain regions and by the market served,” says Arndt. “Additionally, AngelList allows investors to spread the word about a deal with other investors. This improves an entrepreneur’s chance of getting funding because an angel investor can spread risk by investing with a group of other investors.”
4. Find someone who can offer advice in addition to just money. Since angel investors are usually entrepreneurs themselves, they can be great mentors and connectors as well as sources of capital. “An entrepreneur is usually better-off taking a lower valuation for his startup and getting access to a highly connected and knowledgeable angel,” says Arndt. “That option is better than taking more money from an angel that is new to your market and can’t help in any other way.”
5. Make your pitch using the 7 P’s. Arndt says you can learn a lot about what angles want by following a series of seven steps originally formulated by a Californian group called the Tech Coast Angels:
Pitch: Start with your 30-second “elevator speech,” Arndt says. For example, “We are the Google of <insert industry here>.”
People: “Illustrate your key team members and their strengths. A good idea is nothing without good people behind it.”
Pain: “Identify the real-world problem you are solving.”
Product: “Describe the product or service. Even better, have a working prototype to get in the hands of the angel investor.”
Players: “Identify your competition. There are always competitors, even if they are indirect. Angel investors are not naïve and will not believe you if you say you don’t have any competitors.”
Projection: “Show highlights from your business plan. Start at a very high-level with potential market size. Dive into the details only after the investor asks. Trust me, they will ask questions if they are interested.”
Proposition: “This last step deals with possible investment terms. Do not present your expected terms. If the angel investor is interested they will start discussing with you.
6. Have an exit strategy in mind for the angel investor. Ideally you should be able to show how your firm is a desirable target of a larger firm, says Arndt, because that is a clear way to demonstrate than your investor can get their money back. “Exits by acquisition are generally easier and quicker than an exit by doing an IPO,” says Arndt. “An angel investor doesn’t make money until she can sell her stake in your company. Highlighting a possible exit strategy for her shows her that you see things from her perspective, as well.”
7. Don’t expect cash right away! “Angel investors, unlike venture capitalists, are investing with their own money,” says Arndt. “This means the due diligence by the angel investors can be even more rigorous. Be sure to have a few months of cash on hand to overcome this due diligence period. Otherwise, you may end up more desperate and be willing to accept a lower offer to close more quickly.”
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