More than often young entrepreneurs believe that once they have an idea, it in itself is sufficient enough to acquire that Business Angel (BA) investment to get to entrepreneurship Level 2; and while BA’s typically provide billions annually in early stage funding to young companies, they also have a number of set criteria that will indicate the investment readiness of those companies that come across their table.
But what are those criteria? This is what you’ll find out in Angel Investing 101.
Management Team – First and foremost, BA’s look for teams of high-quality entrepreneurs with a track record of leadership and performance in either the specific industry the start-up plans to operate in, or in previous ventures. This also includes the ability to inspire confidence in all the stakeholders, current and future within the company, and finally malleability. Meaning, is the team a pleasure to work with, is it comfortable to receiving
Market opportunity – Do you address major problems for significantly large target markets (i.e. a $100+ million market). The startup has to have a strategy to claim a large share of the market, and while criteria differ between Angel groups, a good target to shoot for is 20{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686}.
Growth potential – Grow quickly and scale is the name of the game here. The company must demonstrate plans to generate sufficient revenues beyond the scope of an initial product offering. Does your startup have multiple revenue streams? How about well conceived financial projections, on what assumptions, and how about cash flow growth and consistent profits?
Competitive advantage – What is it that distinguishes you from the competition, and/or provides barriers to entry for that competition? But what conveys competitive advantage – it includes IP (intellectual property), it’s protection, exclusive licenses, marketing and distribution, & scarce human resources among a handful of other things.
Technology – Let’s face it, Angels prefer to invest in new 1st of a kind ideas rather than augmented concepts of proven products and services. Yet, the technology is not everything, does it have application, is it verifiable? Highly esoteric concepts will be more often than not – treated with caution, and especially if they don’t demonstrate a clear path towards commercialization. Remember, just because it’s new, doesn’t mean it’s good business. Newton anyone.
Use of proceeds – The money invested will be used to accelerate business activity within your startup in order to achieve key milestones and increase the overall value of the company. Funding will often be directed towards R&D activities, sales & marketing, and hiring key personnel.
Exit strategy – Think return 30x, however many angels will invest in a 10x return within a 7-10 year time frame. But how do you attain a 10x return that depends largely on your exit (sale), be it through future funding rounds (VC), sale to a larger industry player, or perhaps IPO. When writing this part of your business plan, be sure to research your industry and look at current trends, everyone wants an IPO or a sale, but sometimes it’s just not feasible.
Fit – Remember that Angels are more than just investors, they are individuals with ample executive experience in a number of fields who will actively coach and help you and your company move forward and succeed. If that personal fit isn’t there, the advice and help you will receive will be greatly compromised and henceforth most Angels tend not to invest in companies where they don’t see a fit happening.
Turns out there are groups of Business Angels (BA’s) out there that charge entrepreneurs and startups to pitch. What? Yes you heard that right, Angels charge startups to pitch. These fees range anywhere from €1000 to €18.000 + 3{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686} of the capital raised to pitch your company to a forum of Angels.
What do you get in return? A fifteen minute slot in front of people that may, or may not invest in your company. Nothing more. Is the price tag worth it? Absolutely not, no angel should require the entrepreneur to pay a fee that will go into their own pocket. These people are after all supposed to be financiers, they are the ones that have the money, not the other way around. Notwithstanding 15 minutes of someone’s time, and especially if they were to have a vested interest in a company is not worth the money.
They will tell you, it’s for screening purposes, they will tell you it’s for x, y, z, but at the end they’re looking to take an equity stake in your enterprise – which according to normal investment criteria should bring them 30x return. Given not all will, but a well differentiated portfolio ought to at least bring in 10-15x return on investment.
Greed, Greed and More Greed?
So why are they charging? Long story short, it’s greed. But it’s not only the angel, there are groups out there that say they will put you in touch with BA’s for a few grand of your “lifeline support system” – basically those few grand that could mean life or death while your company traverses the valley of death. Nonsense. If a filter group wants to earn money through deal flow facilitation there are better ways of doing it than charging the entrepreneur for a fifteen minute slot.
A filter should be paid by all means, no work should go unrewarded, but how? Via percentage of the deal they set up, and a fee – paid for by the BA, and if the startup gets financed from the investment amount.
For example, Joe Filter, finds SuperSatrtup and introduces SuperStartup to BA – BA agrees to pay X for the introduction to Joe Filter, and then after some deliberation BA invests 300k in SuperStartup, due to the positive outcome Joe Filter takes 3{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686} investment fee, or 9k. What do you have as an outcome, Super Startup is happy, as they now have 291k in cash for operational and growth activities, the BA is happy as the BA has a new high growth company in his/her portfolio, and Joe Filter is happy as he’s made some cash. BA = Expected 30x, Joe Filter = 9k+Intro Fee, SuperStartup = Investment, or Win, Win, Win.
If the startup has to pay Joe Filter, and no deal happens, It’s BA = 0, Joe Filter = 1, Startup = -1; or Null, Win, Loss, zero sum game. Or in layman’s terms – just bad economics.
So what’s this all boil down to? Greed. Once again, BA’s are more concerned about themselves than the nature of their business, and filtration systems target the wrong market segment. A “good” BA should have a vested interest in seeing the startups they want to see, as they will be investing in them, they should also then have a vested interest in helping these startups grow. So what does this all mean? Those BA networks that charge the entrepreneur a grand aren’t worth speaking to, especially since the “best possible outcome” is an equity stake in a company.
Any Value Added?
Is there any value added to the Entrepreneur? Nope. Typically, you pay, you pitch, you get rejected, or if you build interest, you’ll wind up covering additional fees. Then you have new funding initiatives such as Revolutionary Angels – that charge 5k to participate in what is effectively a business plan competition that results in two companies receiving 10{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686} and 2{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686} equity investments from the group. But here’s the rub, that equity investment comes from the coffers of other entrepreneurs. An excerpt form their website reads “There is no obligation to submit a plan for review. Companies that are a selected to participate must pay a fee of of $4,995.” – Why do I have the feeling that if you’re willing to dish out 5k, you’ll get selected any way?
Dodgy business practices. By all means?
Value Added Service Fees?
This is different, if as a startup I can get some form of value added service – be it training, non equity mentoring, press, access to a new network, feedback on my business model, where it needs adjustment, how to extend my scalability, how to enter new markets, advice on joint ventures, learning and or education about the process. Then a fee is worthwhile, after all people putting these things together need to eat as well, and as we all know money does not grow on trees, but that value added has to be worth the fee in question. Is that fee worth €18.000 +3{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686}, absolutely not, is it worth €1000, probably not. Is it worth €100, depends what the service is, and how it will help me as an entrepreneur, but then at the end of the day, it’s a service and not an intro fee, or a 15 minute slot in front of me and my network for a grand.
In summation any BA network charging you for 15 minutes of their time is not worth it. If your company has mettle, BA’s in their nature should be more than willing to speak to you about your enterprise.
To read more about the topic of BA networks charging, click here, here, and here.
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We want to know what you think?
This topic is of very special interest to us at F3FUNDIT, why? Well we’re in the process of putting together a new concept event that will truly be focused on the entrepreneur, yet we plan on charging a nominal application fee along with it. Why? Well we need to pay our staff, we need to pay for parts of the event, speakers, training materials, and our time, as well as put together a winner take all cash prize.
We’re not ready quite yet to let the cat out of the bag, but every startup that applies will get something in return, we’re on the side of the entrepreneur and don’t believe that something for nothing should exist, but nonetheless, we’d like to hear your thoughts.
When it’s time to approach business angels there’s a few things to consider and a few other things to keep in mind, and a few even other things that for the most part are common sense yet entrepreneurs tend to forget about all the time.
But before you’re ready to look for someone that will assist you not only in the next round of financing for your company, but also extend a hand in helping to get the company off the ground, you should consider a few things.
For those who read this regularly, we may be repeating ourselves, but bear with us until we get to the meaty stuff.
Am I a functioning company, and do I have a product or service that I can offer for sale, or am I already selling? If the answer is yes, you can consider starting to contact business angels. If you are prior to this stage in your business development, then we highly recommend you save yourself and the business angels the time and not send anything out.
Now, since you’re ready to seek funding, you’re selling a product, and need a financial boost, here’s some very good, yet very simple best practices on….
Raising Angel Capital….
One: This may seem obvious, but apparently it’s not. Do not send your proposals to angels / angel networks that are not in your industry. If you’re a high tech company, a business angel network that deals with energy is not a good idea to send your summary to. Please stick to soliciting people to the industry that you’re in.
Two: Don’t bother sending proposals to “managed” angel funds. These fund managers are often that, just managers, they invest in companies but offer no outside help, and neither do the business angels. These types of funds tend to result in the following. 1. Companies going bust 2. Funds going bust due to poor investment decisions. 3. Angry investors.
Three: Two goes into three nicely, you want an Angel that can lend a helping hand, an industry expert on who you can count on and someone who will want to actively help in getting the company to the next level. That someone should mesh well with the current management, and aside from playing financier, should also want to mentor. This is VERY important.
Four: When sending out your proposal, executive summary, business plan – wait … actually don’t do the third one, never ever do the third one. “But why F3FundIt?” Because no one who is busy wants to read through 25-40 pages of your analysis, and I mean no one.
Send out proposals/exec summaries that are 2 pages maximum. Any more and it will probably wind up in the bin. It’s not that your sweat isn’t worth anything, your b-plan is in fact a guideline for you and your company, not for your investors. They’ll know if they like your concept in the first 3 minutes, and if something catches their eye, they’ll get in touch with you. At the same time, when you contact them, they can’t honestly say “No I haven’t had a chance to read your two page summary”, can they now?
Five: Something that we constantly hear form Angels are complaints about how poorly the company presents itself, how, after 15 minutes of speaking on the phone with an entrepreneur the Business Angels are lost as to what the hell the entrepreneur is doing. Know business terms, get accustomed to knowing your value proposition and pitching your company – practice in front of the mirror if public speaking isn’t your thing. Be clear, and be concise. Your startup will thank you for it, after all your selling it, and yourself.
Live by it, learn it, and do it. Chances are if you follow these tips and you have a good idea – you’ll wind up getting meetings, or at least phone calls.
And if any BA’s are out there, any other pet peeves you’d like to tell us about?
