Are you an entrepreneur looking for seed money to get your startup off the ground? Consider approaching angel investors, who often step in to fill the gap between funding from family and friends and Series A funding from a venture capital firm.
Because angels invest their own money, they’re frequently more willing to back a risky, unproven idea than professional investors. Many angels are retired executives or successful business owners who take an active interest in a startup and its founders, and strive to add value based on their professional expertise and business network.
While venture capital firms tend to be concentrated in a handful of major cities, angel investors are located across the country. Some angels invest on their own, while others organize themselves into angel groups such as the Alliance of Angels, Element 8 and the Puget Sound Venture Club.
If you’re planning to raise money from angel investors, here are some suggestions that will help improve your chances of success:
1. Build trust
Angel investors are entrusting you with their personal cash savings. Show that you are a steadfast individual who will be a good steward of their money.
2. Be transparent
It is better to accurately characterize the status of your company than to try to impress investors with grandiose claims. The moment you are less than forthright with facts, investors will walk away.
3. Simplify your message to express benefits, not features
Customers buy a product because it solves a need, not because of a rich feature set. Discuss the benefits of your product and the burning pain point it addresses.
4. Give investors the information they want
Don’t start by trying to tell investors everything you can about your company. Focus on the highlights, and help them connect the dots on how you’re going to build a game-changing business.
5. Act like your audience is trying to catch a bus
By getting to the point quickly and succinctly, you are demonstrating that you value investors’ time, and that you will show similar respect to your team members, partners, and customers.
6. Use a bottom-up approach to determine market size
A top-down market analysis often relies on subjective, broad-brush assumptions and may not deliver a convincing estimate. The bottom-up approach substantiates your domain expertise and is often better anchored to customer demand and market realities.
7. Competition is a good thing
If there is no competition, chances are there is no market, and thus no business. Describing your competitive advantage and/or barriers to entry is an effective way to communicate how you will win in this market.
8. Be realistic
Your assumptions should be well thought out and attainable, though on the aggressive side. This is your opportunity to demonstrate nuanced business judgment and the scale of your ambition.
9. The numbers should add up correctly
Disconnects between market size, pricing, and financial projections are unlikely to impress investors. They may signal the lack of operational excellence and attention to detail that are crucial to building an iconic business.
10. In fundraising, all other startups are your competition
Most angel investors only have so many dollars to invest in startups, with lots of companies vying for that investment. If your proposed deal terms are significantly out of line with what other startups are offering, many investors will rather pass rather than risk antagonizing you by negotiating.
Yi-Jian Ngo is the Managing Director at Alliance of Angels, a group of 140 angel investors who invest $10M into 20 Pacific Northwest startups each year.