If you are like most people the answer is a loud, YES! There are critical times in a business where access to capital is essential for the company to grow, take advantage of opportunities and become the success it is capable of becoming. The last thing a business wants to do is turn away a revenue generating opportunity for a lack of capital. Additionally a lack of capital can cause what would be a succesful company to fail. According to the Small Business Administration 552,600 new employee firms opened in 2009. Approximately half of them will close within the first five years. It is important as a business owner to anticipate and project out your capital needs and secure capital before that need becomes pressing. Many businesses today that would have traditionally sought after bank financing are turning to other solutions.
Seeking angel investment for your business can be a sound strategy but needs to be navigated skillfully to ensure success. Working with angel investors can take a lot of time and as a business owner your time is valuable so it is important to make it count!According to Investopedia an Angel Investor is “An investor who provides financial backing for small start-ups or entrepreneurs. Angel investors are usually found among an entrepreneur’s family and friends. The capital they provide can be a one-time injection of seed money or ongoing support to carry the company through difficult times.” Angel investors are also found in various groups and organizations throughout the country.
Before seeking angel investment ask yourself the following:
- Why do I need money? Angels typically wont invest in your company for altruistic motives. They invest because they want to make money. The money they give you should help the company generate revenue which in turn generates profits and their return.
- Can this money come from traditional financing? If so this may be a cheaper and quicker option for you. For example if you are expanding and need to purchase $300,000 in new equipment a bank would traditionally finance this type of purchase. Paying it back over a period of time at low interest could be cheaper for you in the long run because once the bank is paid back you do not owe them anything. An angel investor maintains ownership in your company and is owed a portion of the companies profits for the life of that ownership. Do not get married to investors if you do not need to. Your banker wont ask to borrow the company truck but an investor just might!
- What am I willing to give up? What is the investment worth to you? Angels want to make money by investing in your company and they will evaluate your current financial situation, how much you are asking for and the risk involved in order to determine what percentage of the company they will want. As a business owner you need to know what percentage of the company you are willing to part with. Depending on the size of the investment you may no longer have controlling interest. One way to make this determination is to project out what the company will generate in revenue and be valued at over time if the investment takes place vs. if you receive no investment. An owner with 20% of a $10,000,000 company makes more than one with 70% of a $2,000,000 company.
- Why should they invest? It is imperative that you know the answer to this and have research and data to back up your claims. At the end of the day it is all about they money. How much will they make and when? Why will your company succeed? What do you have that your competition does not? As a business owner you understand your company better than anyone else. It is your job to share your vision and why investing in your company is a sound business decision. In other words, “Show me the Money!”.
Once you have answered these questions and are confident that angel investment is the right capital strategy for you it is time to prepare. Prior to approaching angel investors or investment groups do the following:
- Create your business plan. Your business plan should provide the reader with company information: who you are today, where you came from and where you are going in the next five years.
- Analyze your competition. It is critical that you do the research to understand how you fit in the market place and what makes your company special. There is a good chance that someone you present to will be familiar with your industry and competitors. Build a strong case for why you will be more successful. It is not enough to say “We will put them out of business!”, “We will beat them hands down!”… enthusiasm is great but slow down and make a specific business case for why you are better and what you can do to improve with their help.
- Know your numbers. What has your company made in the past and what do you expect it to do in the future if you receive investor dollars? You need to be intimately familiar with all aspects of your profit and loss and balance sheet. If you have someone in your organization that is better at answering financial related questions bring them to meetings as needed. Know off the top of your head how much money you are trying to raise, what percentage of the company that equates to and what the return on investment (ROI) for the investor will be.
- Gather supporting documents. Whether your financials or your marketing statistics investors may ask for back up documentation for everything you disclose in your business plan. Having the supporting documents for every claim prior to meeting will help speed up the process and increase your chance of success. It is easy to forget this step and do the simple things like documenting and providing your sources. A wonderfully forgiving business manager of mine had to stay up to the wee hours of the morning compiling a binder that would rival any encyclopedia collection with sources for a business plan I once wrote. While understanding that I needed it the next day it would have been much easier to do it as we went and I would not have had a stressed out member of my team.
Once you are prepared there are several avenues you can take to find and secure angel investment.
- Family, friends and collegues. People that know you and your history can often be great investment sources. Approach them with caution because money is a tender subject for many and you do not want them to feel pressured to invest because of the personal relationship.
- Online sites and forums. Several sites are in place aimed at connecting entrepreneurs and investors. They each facilitate the process differently but the concept is the same. Businesses register, and often pay a fee, then promote their business in hope of connecting with interested investors. Some sites to consider are: Go BIG Network , Gust, and Funding Post . I will warn you that you will need to carefully sift through the connections you make through these sites. While they try to carefully screen investors it is easy to get hooked up with middle men pretending to be the real thing.
- Angel groups. There are several groups throughout the country that meet on a monthly or quarterly basis to hear from presenting companies with the aim of investing. They will typically invest on an individual basis but here your pitch as a group in an open forum. These groups typically have a screening process and may charge you a fee to present. The benefit is you reach a larger group in one shot. The downside is there is often limited time to speak with people one on one so your presentation and any networking time needs to count. Some of the angel groups to consider are:
With any investor groups be it online or in person vet the people you meet and try to determine quickly whether they are an investor, middle man, or service provider. All three are involved in angel groups and if your goal is raising capital you do not want to spend three months speaking to a CPA that never invests in companies but is there to pick up new clients.
Once you have determined which route to take go forward quickly. An easy mistake to make is taking your time communicating with investors. If you have an idea, strategy or opportunity that meets a market demand and is better than your competition you need to move on it quickly because there is a high probability that someone else will have the same idea shortly. When investors express interest follow up with them immediately, ask what information they need to make a decision and provide the information within 48 hours if possible. By following the above steps you should have most of the information at your finger tips. Ask prospective investors when you should follow up and what it will take to complete the deal. Investors typically have a set amount of capital they are looking to allocate. If they are actively looking it means they are entertaining investment opportunities from multiple companies at the same time. If another company is faster or more responsive then you that investors capital could be spent before you take the second meeting. Understand that you may need to be flexible on some of the terms. Many angels are seasoned investors and know what they want. The good news is if they want to work with you they can be more than just investors, they can be allys that help take your company to the next level.
If you are lucky enough to have multiple investors to chose from narrow it down by analyzing what each investor brings to the table. What value are they adding beyond money? For example do they have connections that will make it easier to close a contract? Do they have industry experience? Can they assist with legal or political matters? Last but not least determine if the investor fits with you and your company culture. Investment relationships are long term and working with investors that are in line with your vision will make the future more profitable and enjoyable. Now get going and good luck!