Entrepreneurs everywhere want to fly with the angels - angel investors that is. But more often than not, dreams have been shattered because the entrepreneur either wasn't ready or didn't know what to expect when seeking investor financing. Here is what you need to know to be able to fly with the angels.
No Revenues – No Investment
Are you just starting your business? If so, you must realize that angel investors have a very low probability of investing in a company with zero revenues. They only want quality projects with experienced principals who are liquid, that have a strong management team, and that have a clear cut exit strategy. So the first lesson to learn is that angel investors want to see some history. This proves to them that your product is attractive to real customers who will pay real money.
New Investors Don't Pay Old Investors
So to get your business started you will most likely end up putting your own money into the business or seek the help of friends and family. Most entrepreneurs then fall into the trap of thinking that an angel investor will come along with financing that will enable the business to pay back the loans from friends and family, as well as the money the entrepreneur himself has invested. It's better to learn now that angel investors don't want to take out other investors. They want to see 100% of their investment put into the business to make it grow. So the lesson to learn here is to focus on your business growth strategy, and that usually means re-investing all the profits and cash flow from the business back into the business. But that's really one of the keys to growth – re-investing your profits back into the business.
Angels Take Their Time
The next thing cash strapped entrepreneurs must realize is that there is a time consuming process involved with angel investor financing. If your business plan does make it into the hands of an angel investor group, it will usually go to a selection committee first where only the best business plans meeting the criteria of the angel investor group will have the opportunity to be presented to the group. The selection committee may take 30 to 60 days to review your business plan and approve it for the investment group to actually look at. The actual investment group may only meet once a quarter, so the entrepreneur may be looking at another 60 to 90 day delay before even getting the chance to present his business plan. So if you are looking for funds to meet next week's payroll, this is not the place to be looking.
Keep It Short and Sweet
When the entrepreneur finally does get his chance to present his story, he will not be given all the time in the world. If he is lucky, he will get a 20 minute time slot to make his presentation. You should plan on the first 10 minutes being your actual presentation and the last 10 minutes being a question and answer period. Spend your first 8 minutes focusing on your product and about 2 minutes on the investment portion itself. Limit any power-point presentations to no more than 10 slides. Here you should have only 2 slides dedicated to the product and 8 dedicated to the investment. Be confident, but truthful. These investment groups have been there done that too many times and they have developed exceptional intuition skills – so don't even think of bluffing your way through.
Due Diligence Is A Slow Process
If you are lucky enough to receive a favorable decision at this level, the angel investment group will then start their due diligence. The due diligence process will vary for different types of companies, but be prepared to have the investment group thoroughly examine every area of your business including the financial, legal, labor, tax, IT, environment and market/commercial situation of your company. They will also be looking into intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits and labor matters, immigration, and international transactions as well. You should plan on a 3 to 12 month time-frame for this process.
So if you have added all this up, you are looking at a minimum of 6 months and maybe as long as 18 months. Not exactly cash in a flash.
Funding Comes In Stages
If you have survived this far, you will be more than ready to cash that check. Now comes another realization – the funding may come in stages, not all at once. Angel investors are usually groups of high net worth individuals who join together to make the investment. This spreads their risk. It also means that the investment group will have to collect the investment funds from the members of the group and the cash is not sitting in their checking accounts just waiting to be disbursed to you. There may be as many as 10 or 15 individuals putting in an average of $30,000 each to fund the angel group investment. So expect the funding to come in stages, not all at once.
Notice something else – 10 to 15 individuals each putting in $30,000 will only add up to somewhere between $300,000 and $450,000. So the last lesson for today is that your $1,000,000 payday will not be coming from angel investors. That's the turf of venture capitalists.
Once you learn what to expect from angel investors, you can prepare yourself to fly with the angels. If you need flying lessons, contact Performance Advisors LLC and we can help you with the process and maybe even introduce you to some real live angels in the process.
My thanks go out to Dave Miller of Strategic Transitions Inc. for his valuable insight and contribution to this article.
Jg
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