Is angel investing right for your business?
February 1, 2013
By Steven Strauss
Question: I started my business about a year ago with some personal funds and the help of friends and family. My problem is that in order to take my business to the next level, I need another infusion of funds. My business plan has me being profitable in 16 months. Can you tell me a bit about angel investing?
Answer: I probably get variations on this question a few times a year. The simplest and most common way to fund a business is through personal funds and friends and family. After that comes the use of credit cards, loans, and other forms of debt financing (you take on debt to get the money.)
On a higher level comes the various forms of equity financing: Angels, angel syndicates, and venture capital (VC) funding. This is called equity financing because you trade ownership shares in your business – equity – in exchange for the funding.
Today I want to tackle the idea of angel financing for a few reasons. First, because the economy has turned around, there seems to be more angel deals happening than there has been in the past few years.
Secondly, and more specifically, I am writing today’s column from Istanbul where I just attended the conference of the European Business Angel Network (EBAN.) Like similar organizations in the States, EBAN members are professional investors and syndicates who love early-stage startup companies with high growth potential. To support these startups, and of course to hopefully get a significant return on their investments, EBAN members receive and review about 40,000 business plans a year.
Generally speaking, VCs deal with investments in businesses that tend to be a bit more mature and who need 7-figure capital infusions to grow, whereas angels tend to make deals in the tens of thousands up to $1 million range. If you have ever seen the television show shark tank, the sharks are angel investors. Here in Turkey, the show is called Dragon’s Den.
While here, I had the chance to meet and speak with a lot of angel investors. I sat in on panels and lectures and left with a much greater appreciation of both angel investing in general, and the vibrant angel community in Europe in particular.
But whether we are talking about European or American angels (or a group of angels who have banded together as an angel syndicate or seed fund), what you need to know if you want angel funding is that it doesn’t come easy. You must be a top-notch start-up to get this level of assistance.
The questions you need to be able to answer to get angel funding are these:
Do you need a loan or an angel? If you need $100,000 just to handle inventory, you need a loan and not an angel investor. Angels do not just offer money, but assistance and expertise as well. You will definitely want their help, smarts, and ideas, and you also may need to put them on your board of directors. Because they get equity, angels become your business partner, not your loan officer.
Are you ready? One of the really interesting things that occurred here at the EBAN conference was a pitch session. Six start-ups, all with compelling strategies, pitched their businesses to the angels. While each was impressive, it was the company that really had traction in terms of sales, strategy, innovation, team, and a plan that came in first. Don’t pitch an angel until your business is ready.
Are you trying to solve a really big problem? Again, as a general rule, an angel would like to see a 10X return on his or her investment within five years. This is only possible if you are trying to solve a big problem that a lot of people will pay for and which lends itself to a business that is scalable; that is, the angel’s money will jumpstart your ability to scale the business bigger.
Are you the best? The angels know that not every investment they make will pan out, in fact many don’t, but the ones that do make up for the losing investments. But even so, one thing I heard over and over again from the sophisticated EBAN angels is that they only want to invest in the very best businesses they see. Less than 5 percent of the businesses plans they see get funding.
Do you have an exit strategy? How will the angel get their money and profit back? Do you plan on selling the business, going public, or what?
The thing I loved best about being around all of these angels for a few days was their commitment to entrepreneurship. Just as entrepreneurs love and need angel investors, so too do angels love the passion, commitment, and energy of entrepreneurs.
Today’s tip: One final thing angels like to see: A secret sauce. What is it that you do that is unique, different, and special? I hope you have a unique value proposition, because you will need it.