At some point in your life, someone has asked you to give or lend them money. How did you react?
If you are like most people, you probably wondered if you would get your money back and how you would get your money back. You probably thought of all the other things you would rather do with that money. You wondered if this was the best use of your money.
If you are a known angel investor, people always have their hands out for your money.
Angel investors are wealthy people who provide money for startups or early-stage companies, normally on a less formal basis than banks or other sources of capital. The U.S. Securities and Exchange Commission’s (SEC) defines such people as accredited investors. The criteria is a net worth of $1 million and income of $200,000 per year or $300,000 per year if jointly with a spouse.
The very name “angel” investor suggests benevolence. If you, your plan, the investor, and the objectives of the investor fit well together, it can be a successful relationship. Finding and attracting angel investing is much easier said than done.
Generally speaking, you will need to go to a search engine and search for angels using keywords relevant to you and them. Angels tend to invest in industries, businesses and markets that they understand, so look around your own industry and market.
Many angels pool their funds into angel funds or angel networks. These can be found online without great difficulty. So once you have located one, prepare yourself. Here are two things to consider:
- Understand your market and your industry well. Demonstrate the potential of your market. Terms such as “Total Addressable Market (TAM)” explain this. Quite simply, TAM is the total market demand for your product or service. For example, if you have created a craft beer, you and potential investors might be interested to know that craft beer sales in the U.S. were $19.6 billion in 2014, according to the Brewers Association.
Of course, competition ensures that nobody will be able to capture the entire TAM. You have to be able to show the portion of your market that you can realistically reach and service. You have to tell the story of how you will accomplish this, which leads us to tip #2.
- Your business plan needs to tell your story. Do you have something that could provide a major advantage as you enter this industry? Is it a new technology? If so, do you have a patent that protects it? Your business plan needs to tell that story.
Can your business be multiplied? Is there a formula possible that allows for rapid growth and enlargement? This is known as scalability and generally speaking, angels are interested in scalable businesses. Can you scale it up? If so, how? Your business plan needs to tell that story.
Keep in mind, the quality, competence, commitment, integrity and professional qualifications of you and your team will be on full display and examined closely. Again, your business plan needs to tell that story.
You need financial statements showing where you are now, and financial projections showing where you could be, if adequately funded. The story of the money needs to be free of hype and should be reasonable, in line with what is normal for your industry. What is your business worth now? This is called valuation, and you are asking the angels to participate. Offer reasonable terms. How will you make good use of their money and return it to them profitably? Your business plan needs to tell that story.
You may have noticed that a well-thought out business plan is a must-have. If you can get your plan before an angel network and pitch them, make it as visually compelling as possible. Expect a panel format. Bring samples if applicable. Also, investors will expect evidence of market penetration such as sales and contracts.
The right approach to presenting a concept is also the right approach to business planning. It is not an academic exercise. It is the story of your well-thought out plan to turn your idea into money and provide a return to the people who invested in you.
If successful, you will win funding and likely, a new mentor.