Heavenly dollars…
The term “Angel investor” encompasses a broad range of people. This includes wealthy people who work at a job to earn a living and make a small handful of investments in startups on the side, to professional investors who make their living from the gains on their investments. The knowledge and experience across this range is equally vast.
The similarity that makes all these people Angel investors is that they are investing their own money and making their own investment decisions.
There are many reasons why Angels choose to do this. Angels tend to be successful business people. Many use Angel investing as a means of “giving back,” of sharing their business experience and helping to grow the local economy. Many enjoy the energy associated with being part of startup companies.
In nearly all cases, Angels expect to earn a profit. Since most startups fail, a far-too-common outcome is that Angels lose money. Nonetheless, most Angels believe they can spot a successful idea better than others, and, like entrepreneurs, they also put their time and money at stake to try to beat the odds.
Individual Angels
As you are introduced to individual Angel investors and as you pitch to them, remember that raising money is a sales process. Before you jump in and start pitching, take some time to understand your customer. In this case, your customer is the investor. Why does he/she invest in startups? What other investments has she made? How involved does he like to be in his investments?
At the beginning of your pitch, be explicit that questions are welcome at any time. Expect to be interrupted. However, defer answering questions that you answer later in the pitch. It is a careful balance to keep control of your story but still encourage a conversation. Having an investor engaged in your presentation is a good sign of interest in an investment. Having an investor drive your presentation is a sign that this investor may be difficult to work with, if you accept their investment.
After the pitch, promise to send a copy of the presentation. In your follow-up, include other details as well, such as an Executive Summary. Offer to answer any additional questions.
Again, raising money is a sales process and a process that normally takes a few conversations before you can expect to close the sale.
Angel Groups
Given the high risk of failure, Angels flock together in groups to pool their resources and find the best deals. Additionally, investing together makes it easier to provide sufficient capital for the startups. Hundreds of so-called “Angel Groups” are organized around the United States, and there are hundreds or thousands more around the world.
There are many similarities across these groups. They are often organized as a nonprofit or unincorporated club. They can have from a dozen to a hundred members, typically all residing in a single city. One or two members manage the “deal flow,” communicating with the entrepreneurs who are seeking investments from the group, screening them, and deciding which entrepreneurs will be introduced to the whole group. Every month or so, the group meets in person, with three or four or five entrepreneurs pitching their plans for five to ten minutes, plus some time for questions and answers. Some members may choose to do some due diligence over the following weeks, and all members choose individually whether to invest or not.
Most Angel groups charge a fee to the entrepreneurs for the right to pitch. This fee offsets the costs of the lunch and assorted fees of operating the group. You pay the fee regardless of whether you succeed at raising any funding. This is in part because the investments all come directly from the members, not from the group itself, and in part because the securities regulations forbid a fee to be charged only upon success.
The timeline for raising money through an Angel group is typically between three and six months. Expect to spend at least one to two months making your way through the screening process. For the biggest, most popular, and most successful groups, the deals for the next three luncheons may already be scheduled.
More than a dozen companies may be screened each month, with typically just three to five invited to pitch at each meeting. Every one of those entrepreneurs believes they have the best idea and the best investment opportunity. To land one of those invitations and not waste your time, first make sure that the Angel group is interested in the market you are targeting. Make sure, as well, that your company is far enough along to merit an investment, that your offer is reasonable, and that you are presenting the key facts in an understandable manner. See The Next Step: A Guide to Pitching Your Idea for tips on putting together your pitch.
Once you get past the screening and are invited to pitch, ask about the details of the format, the setup of the room, the timing of the pitch and Q&A, whether there is any networking before or after the pitch, and the format of the follow-up due diligence process. You will only get a few minutes to present in front of the group. Prepare well in advance to match their format. And practice, practice, practice.
If any of the members are interested in your company, the last step is a follow-up meeting. This time, you meet with one or more of those members to revisit some of the details from your pitch, and they have an opportunity to ask you deeper questions about your business. This is the due diligence process, and it alone can take anywhere from a few days to a few weeks or even a few months to complete. I said earlier that fundraising is a sales process, and this is where you will need to build relationships and build trust to close the deal. Good answers to questions and continued good storytelling are the keys to doing that.
After all that, a few of the members may make investments in your company, and they may work behind the scenes to bring other members along, as well. The stronger your “champion” in the group, the better your chances of receiving any investment from the group.
