The recent government focus on innovation and a number of successful startup exits have delivered fantastic exposure for early-stage ventures, resulting in more entrepreneurs than ever before pitching their ideas to investors.
The early stage funding ecosystem is varied and complex.
To ensure entrepreneurs fully capitalise on this “ideas boom” and attract the necessary capital, it’s crucial that entrepreneurs understand the difference between funding sources.
Angel investors are typically high net worth individuals who want to work in collaboration with other experienced investors to pool their resources and help diversify their risk.
Angel investors provide capital, connections and experience typically in a syndicate, and here’s how to attract them to your startup.
1. Get the fundamentals right
People make great businesses. Angels are looking primarily for inspirational founders who can do more than talk up an idea, but also lead a business team to deliver a healthy risk adjusted return on capital invested. Attract the right people for your business to attract the right funding.
Great businesses are often the result of strategic and execution planning.
Take the time to step out and climb to the top of your mountain. Many startups pitch great ideas that lack the right people or plan and fail to get funding as a result.
2. Know the angel audience and pitch accordingly
Identify the angel group most suitable to your business – this may mean pitching in another state or city.
Angels often have domain expertise and networks in one or more sectors, and tend to invest in these areas or business models. This means startups need to know their industry dynamics and key business metrics when pitching, as well as understand the resources required to win. Data driven startups know what they need stand out.
3. Provide an opportunity for angels to value add
An angel deal differs from aggressive shark-style funding.
Angels typically look to add value and achieve reasonable returns on a diversified portfolio. Angels may take an active interest in the business either on the board of directors, an advisory board or helping with network introductions, business guidance and founder mentorship.
Angels are helpful with key strategic decisions, leadership team hires or raising additional funds. Be mindful of the angel value add when drafting a terms sheet.
4. Be deal ready
So the angels love your pitch, now what?
Often, companies are under prepared for due diligence and drag out the process. To save time and sustain deal momentum, I always recommend that startups prepare and offer the background information that supports their business proposition. This includes a detailed outline of the competition, product, pricing, business and financial model, leadership background, regulatory and legal aspects as well as other transactions.
Post-pitch, angels will conduct two to three meetings amongst themselves to work through the high-level pros and cons of the investment before progressing to deal stage.
Having an engaging pitch isn’t enough to get a deal over the line; it’s the ensuing due diligence stage that is the most critical part of all, and the stage where many deals may drop out.
5. Be realistic
While angels don’t necessarily need to see a product that is already built and demonstrating commercial traction before they are willing to invest, the reality is that out of every 10 investments an angel will make, more than half of those may fail, with only one or two delivering stellar returns, and around three to four breaking even.
Angels are experienced in this “investment lottery”, which in turn impacts significantly on their decisions. So you have to thoroughly convince an angel that you are worth taking a risk on, and that their investment in you will fall into the 20% portion of their portfolio that actually delivers. Terms should reflect this early stage risk.
Angels place great importance on the quality of the founders, retaining and incentivising their performance.
Ultimately, angels want to be the ones to give your business the wings it needs to soar and succeed.
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