I’m not your average angel. I’m a mom, a full-time sales manager, and recruiter. I’m not active in an angel group. I don’t have an MBA and I don’t live in Silicon Valley. I live in a small town surrounded by farms and I made my first angel investment at 29 because my dad said it was a good idea.
I’m not your average angel. Or am I? And why should you care?
According to the Angel Capital Association:
- Angels (private money) invest in 55,000 startups each year versus 1,500 companies by VC (venture capital) funding.
- Last year, angel investments surpassed VC’s by $3 billion (15%).
- Angels invest in one out of every forty deals they review (2.5%) versus the one out of 400 by VC’s (0.25%) .
- There are 225,000 angels who made investments over the last two years and only 15,000 of them belong to angel groups. Furthermore, according to the IRS, about 3.9 million people qualify as accredited investors.
What does that mean?
1. Entrepreneurs need to find a way to get traction (sales) without funding.
2. If companies get funded at all, it’s likely to be from an angel, and an angel who is not part of an investment group. If entrepreneurs are only pitching to angel groups, they’re only pitching to 6% of the active angels, and 0.4% of the total qualified investors to which they could have access.
But, you might say, “the JOBS Act, the JOBS Act! Title III, Title III!” Yes, the JOBS Act (Jumpstart Our Business Startups) is exciting, and it will bring a lot more potential investors into the marketplace.
But the reality is, when you open up fundraising to non-accredited investors—according to Kickstarter, who already has—58% of companies fail to reach their funding goal, and 60% of those who failed didn’t raise 20% of their goal. Moreover, only 13% of these successful campaigns raised over $20k.
I’m not saying don’t utilize a crowdfunding platform. I’m saying be realistic about what can be raised. Taking a campaign online and encouraging non-accredited investors to use a crowdfunding platform is a great way to show their support, manage the volume, and market your business.
However, entrepreneurs still need to approach angel investors offline for larger amounts of capital. So, who are these unlikely angels? They are professionals with full-time jobs, who often don’t have time for due diligence (and may not even know how to do it) and often make decisions through trusted referrals or based on gut feelings (more on gut feelings later).
She’s likely a local professional who prefers to invest in her own backyard. Think lawyer, dentist, or plastic surgeon. He’s a busy professional and won’t have his nose in your business; if he makes a decision to invest in your company, it’s because he trusts you’ll run it properly.
Big plus? They represent a segment of the available capital that can fund your business who aren’t hounded by deals on a regular basis. So your company will be considered individually, not stacked up against 40 others as it would be in an angel group.
So, how do you get their attention—and their money?
16 Tips on Raising Startup Funding from Unlikely Angels
1. Write a great business plan, but know that few will read it.
Business plans are an extremely valuable exercise and should always be presented to show the entrepreneur is serious and has done his homework. However, no one will read past the first page unless they’ve already made somewhat of a gut decision to read further.
So, always include a compelling summary page with visual elements that “advertise” your company. BPlans is a great tool for this. Add video if delivering electronically (try Animoto) and keep it under one minute. People have short attention spans!
2. Don’t use acronyms (unless you define them).
People outside your industry will be reading your materials and it is intimidating to read something laden with acronyms. It distances potential investors and they will not have that “gut” feeling they need to get excited. Instead, they will say, “I don’t know enough about this industry to invest in it.”
Additionally, the same acronym will translate differently across industries. B.A. could be a Business Analyst, a Bachelor of Arts, or a Bad Ass. Similarly, dumb down your business plan to an elementary reading level. Your dentist may want to invest in your new software, but she doesn’t know what SaaS is, and Software as a Service doesn’t help her, either.
So, if you reference Software as a Service, you might want to add, “A piece of software you access through the internet and is paid for on a subscription basis, like Salesforce.com.” Oh yeah, now it makes sense.
3. ABP: Always be pitching.
How does one do this without being obnoxious? By putting himself in as many opportunities as possible for people to ask what he does.
The best way to do this is by asking others what they do first and being genuinely curious about the answer. Naturally, they will follow up by asking what you do. Then know your one sentence answer and follow up with “and we’re raising funds from private investors to get us started.” They will typically ask a question about your business and the conversation begins!
You can do this anywhere. It doesn’t have to be at a formal networking event. The purpose is not to ask the person for money; the purpose is to let everyone know what you do and that you are looking for capital so they can either invest in you or make introductions to people who will.
4. Have a pitch party!
Most angels or potential angels aren’t part of a group, but there is value in the group dynamic. Potential investors (and people who know them) get to see that others are excited about the product too, and it reinforces their own positive feelings. Few people want to be “the first” or “the only” investor in your product. Use the power of social proof in your favor.
How? First, get a venue and a time. You shouldn’t have to pay for these. Perhaps the library or a local tech company can host. Look for community supporters and ask around about space. Make the event a weeknight around 7pm, a reasonable time for professionals to get there after work. Offer snacks and drinks and have copies of your business plan ready to go. Allow time for people to network (half an hour usually works) and then welcome everyone and do your pitch. Make your invitations open so people who are not angels can still refer and bring friends. Get them excited about the prospect of a new company opening in their own backyard!
Bonus points: Ask a local expert to give a talk on your industry (make sure it supports your business idea). This gives the attendees another reason to come, allows him to advertise his business, and sets the stage for your pitch.
5. Go for the gut.
You’ll often hear investors say, “I look at all the details, do all the due diligence, but ultimately, I make a decision with my gut.” What does that mean? And how are you supposed to know how their gut feels that day? It’s because pitching is making a sale and all sales are made emotionally and followed up with logic.
Wait, you didn’t want to be a sales person? Well, welcome to the dark side. Everyone is selling something, whether they have the title or not. A professional knows how to navigate through—but not manipulate—people’s emotions. Mostly what they will be buying into is their feeling about the entrepreneur and her passion for the product. After all, the entrepreneur is the one who will be waking up at five every morning to build the company, and she’ll never be more excited about the business than she is today.
Whether you’re speaking one-on-one or pitching to a group, know that 90% of your job is to get people excited about your company. Statistics, facts and figures, profit and loss, projections—all those comprise the other 10%, which is logic. It takes 100% to move forward with the decision to invest, but don’t undervalue the emotional aspect. That’s why the most entertaining pitches get a second look, and ones that are more viable may get ignored.
Substance will come later. The shorter the pitch, the more it should appeal to emotion. Only then will you be given the opportunity to support their excitement with logic.
6. Be transparent.
Though the amount of detailed due diligence done by an angel or angel group can seem intrusive, you’re getting into a long term relationship and full disclosure is required. If there are any holes in your proverbial bucket, now is the time to leak them.
What you may think is a deal breaker may be perceived as a surmountable challenge by an experienced investor. Those pesky requests from angel investors delving into all the private parts of your business will not be as much of hassle if they are anticipated and prepared. Everything does not need to be disclosed right away, but as a serious business owner, you should have the following ready to go:
- Business Plan (should define market, problem, growth potential, sales channels, competition, patent info, exit strategy, profit margins, scalability, milestone markers)
- Financial Model and Balance Sheet (even if there are zeros across the board)
- Management Resumes and Organizational Chart
- Customer References
- Personal References
- Social Security Numbers (for background checks)
- Capitalization Table and Shareholder Roster
- Stock Option
- Contact Information (for managers, directors, shareholders, developers if outsourced, attorneys, accountants, consultants)
7. But don’t ask for a non-disclosure.
Non-disclosures put a bad taste in people’s mouths and most angels won’t sign them. They see so many deals and many of them are similar. They don’t want to be legally tied to you forever because they are considering an investment, and ultimately you should really only be pitching to people you trust. If something highly confidential is undergoing patent protection, you won’t be expected to disclose the patentable aspects until much further into the conversation.
8. Know your numbers.
Someone who holds the title CEO needs to know the entire business inside and out, and that means knowing the numbers. If someone assisted with the financials, make sure you understand it well enough to explain it to someone else and field questions.
If you are more of a technical person and not a business leader by nature, make sure your investor knows that you intend to hire a CEO to take your place as soon as reasonably possible. Most investors prefer to invest in a business, not just a product.
9. Build your board of advisors.
Unless you have built and sold a company before in the same market, you need to have a board of advisors that fills in the gaps in the management team and your own knowledge and experience. Sometimes these are angels themselves. List them in your business plan. Showing that industry experts are guiding you through decisions is very comforting to the average angel who won’t be able to contribute in that way.
10. Invest in your own business first.
Angels are more likely to invest in entrepreneurs who have invested in their own companies first or gotten friends and family to buy into the idea. If I had to put a number to it, I’d say at least the first $25k in cash.
If you’re thinking, I just graduated college, I have no money—I’ve been there. I highly suggest getting a job. There is value to an entrepreneur who can work on his business full-time, but there is more value to one who has had real world professional experience. Invest all your earnings and your extra time into your business. Take advantage of the extra time and minimal financial obligations of youth!
11. But don’t invest too much.
You can invest too much. Anything over $100,000 raises a flag for me, personally, though other angels may disagree. Cash is king, so leveraging it is important. It leads me to believe the entrepreneur avoided giving up equity as long as possible and now needs capital to get out of a financial crisis.
There are always exceptions, so if you’ve invested a lot of your own money, be prepared to address it, knowing that angels may have unvoiced concerns.
12. Uncle Sam is an angel.
Many people aren’t aware that the IRS allows them to make private investments out of their tax-deferred, self-directed retirement accounts. There are tons of rules, of course, but the right custodian can make it very easy.
Self-employed people are permitted to stash away considerably more in their retirement accounts than employees and they are investing it anyway (usually in the stock market) so they may want to dedicate a portion of their portfolio to angel investments. That being said, angel investments are inherently risky and just because Uncle Sam says it’s okay, doesn’t mean any of them are endorsed or qualified in any way by the IRS.
13. Be realistic about your valuation.
You may have heard a valuation should be doubled because investors will cut it in half. That’s become “expected.” However, it also makes the investor question your logic. There’s always the awkward moment of looking an entrepreneur in the eye and asking, “Five million? Really?”
Negotiation cannot be avoided, but it doesn’t have to be a negative process.
14. Create a plan B to your B plan.
What happens if you never get another investment? With the statistics above, it is very unlikely a company will get funding at all. Companies have less than a 1% chance of getting funded by a venture fund and less than 3% by angels. That likelihood goes down if you are not in Silicon Valley or Boston.
So, you need to have a backup plan. Should you never receive another dime, how is your company going to be successful? Where will the $50k go specifically to further the business, even if the other $950k is never raised?
15. Ask for more than cash.
Most average angels won’t have time to dig in deep and help you with your business since they have full-time professions that are likely unrelated to what you do.
However, you can still leverage their expertise. Everyone can contribute something, whether it be sales advice, desk space, or an introduction to their network. If they feel like they are contributing in some way to the success of your business they will have more perceived control of the outcome.
16. Ask not what your angel can do you for you, ask what you can do for your angel.
An angel investment is not just a financial transaction. It’s the beginning of a long term relationship. You may think the possibility of getting a 20X return on an investment is enough of a thank you. But the odds show they will likely never see that money again. Angels usually run a business themselves, or hold C- or V-level roles at one. How can you help him with his business or personal goals? What kind of people can you connect him with? What kind of people make great customers for him? Employees? Partners?
The more other-focused you are, the more people will realize you are not an automaton, but an interconnected part of their community. We are all here to help each other out, right? Make sure you bring your personal values into your business relationships. Investors will know when it comes to making hard decisions for your business, you have the right values in place to guide you.
All this being said, getting funded is not the end goal. It can take a lot of time and should only be done when your business is ready to scale (the preferential stage of most angels I know).
Many young entrepreneurs feel getting funding, whether it be meeting their crowdfunding goal or attracting venture capital, is validation for their business. It’s not. It does not guarantee your business will thrive.
In general, most companies fail. Not coincidentally, most venture funded companies will also fail. So getting funding does not inherently improve your chances of success. There is an appropriate model and stage for raising massive amounts of cash.
Get your product to the market with or without it! Whatever it is you’re working on, it’s probably going to change the world, and we need you!