The 10 Commandments of Obtaining Angel Funding
This piece was originally published on AllBusiness.
To get angel investors to invest in your start-up, you have to make sure you understand their motivation. You also have to make yourself stand out somehow, and ensure you can succinctly articulate your vision for the business and why it has the potential to grow into a significant company. Here are 10 commandments to follow in order to make your pitch successful.
1. Articulate the big problem you are solving
You need to clearly explain why your proposed product or service is solving some big problem or important unmet need in the marketplace. Here are key questions to consider:
- What is the problem?
- Why are existing solutions inadequate?
- How does your solution differ from the competition?
2. Show why the market opportunity is large
Angel investors typically want to invest in businesses that have a large market opportunity and can grow to be very big. Here are important questions the entrepreneur needs to address:
- How big is the addressable market opportunity?
- What data do you have to back up your claims about the total addressable market and growth rate?
- What percentage of the market do you plan to capture, and over what time period?
3. Show why the founders are uniquely suited for success in this venture
For many angel investors, the founders/management team is the most important factor in determining whether to invest or not. So try to convey the following:
- That the founders are passionate, dedicated, and have integrity
- That the founders have relevant domain experience
- That the founders can work well together and are complimentary
- That the founders are strongly motivated
4. Give a demonstration or show a prototype
An image, demonstration, or prototype goes a long way in giving the angel investors a powerful understanding of your business. Be sure to do the following:
- Highlight the differentiating features compared with your competition.
- Strive to present a great user interface or product look and feel.
- Discuss the key intellectual property and technology underlying your product.
If you have beta testers who have used your product, discuss the learnings you have gained from their feedback.
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5. Get quality introductions to the angel investors
The best way to get the attention of an angel investor is via an introduction from one of their trusted colleagues. Start by using LinkedIn to see if you have any connections to the investors. Angel investors can be found through:
- www.angel.co (AngelList)
- Angel investor networks
- Venture capitalists
- Investment bankers
- Crowdfunding sites like Indiegogo and Kickstarter
Once you get the introduction, here is what your email to the angel investor should include:
- The name of the person who referred you to the investor.
- Short bullet points about what your company does, what problem it’s solving, and any early traction its gotten.
- Information showing the founders to be competent, passionate, and experienced.
- A 2-3 page Executive Summary or 15-20 page PowerPoint investment deck.
6. Prepare a great pitch deck
You need a great PowerPoint presentation/pitch deck when presenting to angel investors. It needs to tell a compelling vision and story. This deck should be no longer than 15-20 slides, and contain the following key information:
- The overview of the company
- The problem you are going to solve
- The market opportunity (and that it is large and growing)
- The management team
- The technology and intellectual property
- The product or service
- The revenue/business model
- The marketing strategy
- Any early traction, market validation, or early customers
- The competition and your advantage over the competition
- Financials and projections (and be prepared to answer questions on underlying assumptions)
7. Don’t make these mistakes when pitching to angel investors
Avoid the following:
- Don’t give the investor a 50-page plan to review. They don’t have the time.
- Don’t say you have no competition.
- Don’t show unrealistic or uninteresting financial projections.
- Don’t ask the investor to sign a non-disclosure agreement (NDA).
- Don’t present unrealistic valuation expectations for your company.
- Don’t underestimate customer acquisition issues.
- Don’t underestimate competitors.
For an in-depth discussion of the mistakes that many start-ups make in this regard, see 28 Mistakes Start-Ups Make When Pitching to Investors.
8. Prepare, prepare, and prepare some more for the pitch meeting
You typically get one meeting to impress a potential investor. So make sure you are prepared for the meeting by doing the following:
- Practice your pitch in front of an audience and get feedback.
- Review the investor’s LinkedIn profile and website.
- If you have common connections on LinkedIn, ask those people for any insights on the investor.
- Review what portfolio companies the investor has invested in.
- Be prepared to answer questions concisely.
9. Show any early traction or adoption
Demonstrating that you have gotten early adoption or paying customers puts you far ahead of entrepreneurs who just have an idea or business plan. So, if you have an app, get as many downloads of your beta version that you can get. If you have gotten good press or good reviews, make sure to share that. Customer testimonials can also be helpful.
10. Show that you have thought through financials and projections
Angel investors will want to understand the financials of the business and any financial projections. So be prepared to answer the following questions:
- Do you have detailed financial projections for the next three years?
- What are the key underlying assumptions for the projections? Are they reasonable?
- What are the key cost components for the product?
- What are the unit economics and gross margins?
- What will be your monthly “burn” rate (expense rate)?
- How much capital are you raising?
- How long will that capital last?
- What will you be able to prove with that capital?
- What is your desired pre-money valuation for the company?
- What is the cost of customer acquisition?
By following these guidelines, an entrepreneur stands a better change of obtaining angel financing.