GREAT 27 IDEA: Find Yourself an Angel
Bettina Hein is the perfect person to ask about raising angel capital. She's raised $9 million to start two small, high-tech companies—with about $6 million coming from angel or private investors. After founding a speech technology software company in her native Switzerland, she moved to Boston to start another venture, Pixability Inc. (http://www.pixability.com). Pixability helps customers quickly and affordably edit and post high-quality video clips to the Web.
“I do not come from a rich family or have any special connections,” Hein told me. “In fact, I was a young female with no previous business experience. If I can do it, you can do it.”
If your company is too young, too risky, or too offbeat to qualify for traditional bank financing or won't grow fast enough to intrigue a VC, you probably need angels. Angels are private investors, usually successful entrepreneurs, who prefer to invest in small businesses in their industry and close to home.
Hein said the first step toward raising money from angels is to have a well-written business plan (see Great Idea #25), a compelling executive summary, up-to-date financials, and at least one real customer. Dress well, get a good night's sleep, and rehearse your presentation. Plan to prepare a slide deck with about 15 slides. Make hard copies of the deck to leave behind, or give everyone the presentation on a USB drive.
“Remember, you are a salesperson, and you have to have your act together,” she said. “Finding angels is all about relation-based selling.”
Since you are dealing with private individuals, it is important to be introduced by personal contacts. This is why building up your professional network is essential. Be a detective. Find out who the potential angel knows, what schools they attended, groups they belong to, and so on.
Hein said angels are usually very social people and respected industry leaders. It is crucial to find a “lead angel” who will vouch for you and make introductions to other angels. Once you have an angel investor, invite them to accompany you to meet with other potential investors. Their presence adds credibility to your pitch.
“Angels serve as their own investment committee, so it's important that they like you and feel an affinity for you,” said Hein. Since she operates in a high-tech world, most of her angels are retired telecommunications executives who need to “feel like they are still in the game.”
“First, I ask them for advice—not for money,” said Hein. “I truly listen to what they have to say, acknowledge their tips and advice, and give them progress reports.”
Remember, the average angel invests about $25,000, so you don't need to pitch only the super-rich. Finally, Hein reminds us not to take rejection personally, but be persistent. “You are never going to get the check on the first date.”
If possible, invite your angel to become a member of your formal board of directors or an advisory board. Many angels like to keep a close eye on their money; plus, they can offer you invaluable advice.
Tips for attracting angel investors:
- Prepare a well-researched, detailed business plan that explains what you plan to do with the money.
- Your executive summary needs one page explaining why someone should invest in your business. Explain, too, how you plan to repay the money and when.
- Join a professional association or trade group for your industry to start meeting the movers and shakers. Be an active and high-profile member.
- Discreetly inquire about which members have invested in small businesses.
- Once you meet a prospect, request a short meeting to discuss your proposal.
- Be prepared to answer all questions and bring along extra copies of your business plan and executive summary.
- Rehearse your presentation before the meeting. You want to be as confident and relaxed as possible.
- If the investor is interested, move to the next step. Bring in your accountant and attorney to close the deal and draft the agreements.
Note: Some angels prefer to make loans at rates comparable to banks or at a slightly higher rate. Others may want to be repaid in stock if your company eventually goes public. Be sure to tailor the financial arrangements to fit your angel's needs.
Howard Sherman, CEO of Inventure Holdings LLC, a Los Angeles–based investment company, has invested in nearly a dozen small companies. He said he is personally attracted to companies that offer solutions to problems. For instance, he's invested in two medical device companies; one involves a new technology to cool down overheated bodies, and the other company makes a new surgical scalpel that reduces scarring and virtually eliminates bleeding. The cooling device has many applications, including cooling soldiers in the battlefield and for people suffering from multiple sclerosis. People with MS often find their symptoms worsen in hot weather.
How to Raise Money from Your Family or Friends
While it's usually better to raise money from professionals, most business owners start with money invested by friends and relatives. But taking money from people you know can be sticky. So here are some tips:
- Make sure the person understands your business concept and all the risks involved in investing— put it all in writing.
- Treat a family member or friend like all the other investors.
- Provide frequent updates explaining what's going on with the business. Be honest.
- Don't discuss business matters at family gatherings or social events.
- Never offer an investment opportunity to anyone who can't afford to lose it all.
Sherman, who prefers to sit on the board of the companies he invests in, said angel money is usually based on a personal relationship. The investor also has to feel some affinity for the product or service. “Sometimes you can position a product as something that will change lives, and then investors view it as almost donating to a charity.”