Pitching to angel investors can be difficult at the best of times. Not only can it be nerve-wracking to talk about the ins and outs of your startup, but most of the time you’re just not sure what they want to hear.
There are lots of different types of angel investors — they aren’t all ‘high-net-worth’ individuals like you see on Shark Tank. Because they are so diverse, they have different preferences — they are looking for different things in a company and favour different criterion. However, based on my research talking to angel investors, there are four factors they all have in common when choosing which startup to invest in.
An angel investor’s personal experience guides them when deciding whether to invest in your startup, so you have to approach them in the right way.
One of the most important aspects for angel investors is their personal experience with the person who tells them about your startup. This means that you need to deliberately build relationships with people who may know angel investors (accountants are a good place to start, but also suppliers and some clients). What it also means is that direct approaches to angel investors or angel networks are unlikely to yield results.
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Personal experience also applies to how they approach due diligence and evaluation. Research shows that there is a lot of inconsistency in the types of financial indicators investors use. However, every investor I’ve spoken to agreed founders need to know the important aspects: your cashflow, how you’re optimising your business model, and how you will realise the return on their investment. So, emphasise these factors when presenting your business to a potential investor.
Trust is made up of two components: trust in someone’s competence, and trust in their integrity.
The first thing angels look for is whether the entrepreneur is still an owner of the business. This is one common way of dealing with trust issues, though it isn’t a particularly good one because it relies on avoiding mutually assured destruction and does nothing to develop trust. The best approach is to build trust through your behaviour and you will be more likely to receive an offer from an investor:
- Be honest and open (if there is something you don’t know, acknowledge it);
- Be upfront about how you will use their capital (remember, capital is long term, so you shouldn’t use it to buy office furniture!);
- Be willing to accept advice (be coachable); and
- Be a reliable communicator (talk to people, don’t rely on email).
The need to contribute
A need to contribute is what sets angel investors apart, and it is the most valuable aspect of angel finance. An angel’s post-investment involvement opens up new opportunities and provides access to skills, knowledge and contacts that would otherwise be unavailable. In short, they add value beyond money. The right angel investor gets a sense of achievement and fulfilment from being involved in a new venture.
The best angel for you will have relevant industry knowledge and experience. This is why I encourage entrepreneurs to develop industry networks to seek out angel investors in a targeted way rather than going to angel networks or incubators. And watch out for ‘diversifying’ angels. If your company is just one in a portfolio, they are likely to be spread too thinly to add much value to your firm.
Developing a good working relationship with your angel investor from the beginning is the key to tapping into the value they can add to your business beyond funding.
It’s important for both the angel and you to be honest, upfront and realistic. An angel investor will expect an equity stake in your firm. Don’t be too worried, a good angel investor also wants you to have equity.
You need to be realistic about the value of your firm. You must have something that is inherently valuable: existing customers is one thing that angel investors look for.
Entrepreneurs are often optimistic, but you need to have a realistic view of the potential of your business, particularly for scaling into markets, level of competition, and market size. Be realistic about the financial value of your business and how it will grow, and how an investor will realise their returns. Most often it’s a trade sale, so think about how that might play out.
You can still be optimistic, in fact, optimistic entrepreneurs are better at obtaining finance, often at a lower cost.
Finding angels isn’t simple, unfortunately. You can’t just present your plan and hope for the best. You need to find the right angel, one who can bring human and social capital along with their financial investment.
In Australia, at least, the best way of finding the right business angel is to develop your personal networks. Talk to people and keep in contact with them on a more meaningful level than just social media.
Finally, remember that everything takes three times longer than you think it will — especially the money part!