Angel Investing - How to Persuade an Angel
At some point, most businesses need additional capital to build more products, increase personnel or as we've seen on Wall Street lately, get out of trouble.
Hopefully your business will never experience the latter, nonetheless capital is needed.
I've seen a ton of ways not to raise capital and finally myself have figured out the magic formula to actually raising it and I thought I'd pass it on to you.
Before we get into the specifics of approaching an angel investor, it's always good to know a little history about what you are doing.
The term "Angel Investor" was first used back in the early 1900's to describe wealthy businessmen that invested in unpopular Broadway productions.
Oftentimes these productions had no where to turn and when the investors stepped in they were looked at as "Angels".
In modern day, Angel Investors are wealthy businessmen (or women) who have at least $1 million dollars in net worth and an active income of over $200,000.
Not only do "Angels" invest but they also advise and leverage contacts from other business partnerships that were successful in the past.
So now that you know what "Angels" do, let's talk about getting them to write you a check.
Build Relationships Now Angels tend to be wealthier people who are or were active in business.
Think about everyone you know and make a list of everyone who is a potential investor in your idea or product.
Start with people who are closest to you like family and friends and then work your way out to mentors and then friends of friends and so on.
In the initial stages, Angels tend to be people who are within 3 degrees of separation or less from you.
If you cannot think of anyone who is a potential candidate or don't want to do business with anyone that close to you, checkout the Angel Capital Association website.
This is a great resource to find Angel groups across the entire country.
Building relationships isn't really that hard but there is one thing to avoid.
Never ask for money on the first meeting.
This is an easy way to turn off an "Angel" or anyone else for that matter.
Instead, talk about who you are and why you'd like to get to know this Angel (other than the fact they have a lot of dough) it's really good to know about some of the Angel's business accomplishments.
Always put yourself in the position to learn from the Angel.
Ask for feedback about yourself and slowly introduce the product, when the time is right (you'll know) make the pitch.
Unfortunately, this thing doesn't happen overnight.
Someone really has to trust you to write you a check, nonetheless you can do it.
Demonstrate Domain Knowledge Trust is very important when engaging an "Angel" so you have to demonstrate that you know every angle of the industry.
The best way to do this is to become the industry.
What I mean by this is that you need to read every market research report, acquisition announcement, news occurrence and even publish information yourself.
In doing this, you show the Angel that you are highly passionate and invested in the industry that you want to build a business in.
Spark conversations with the Angel about your industry while discreetly (and humbly) showing the Angel that you are very knowledgeable in all aspects of the industry.
If there are questions that you or your Angel can't answer make sure to research and submit the answers to the Angel.
This will show your resilience and ability to find less common information.
All of this activity quietly builds confidence in the Angel's eyes that you are a good bet.
Publicize Small Wins I've noticed that most people don't like to "toot" their own horn but when persuading Angels this is a must.
It's not that you are cocky, arrogant or even conceited but seeing that your relationship is still new with the Angel, you have to give them every reason to feel like you are positively different.
If you are a new entrepreneur, demonstrate what you were able to do with your company previously.
Maybe this was generating $5K in sales per month with an initial marketing budget of $100.
If your in the corporate world, maybe it's being named "Salesman of The Year" in your office.
If you haven't won any awards, get recommendations from your employer about your industry knowledge and work ethic.
Whatever it is, show that you are different and better than other startup owners your "Angel" knows.
Remember This: Investors Bet On The Jockey, Not The Horse.
Prove Scalability In Your Model There are a ton of good business ideas out there but one thing that stops them are their inability to scale.
So what does it truly mean to scale? Scalability occurs when a system (your startup) is built and as there are more "transactions" (sales, users, etc...
) costs remain relatively constant.
It is extremely important for Angels to see a scalable business model because that means that their is big profit potential in the future.
Technology companies (especially software) do this really well because the product for the most part is intangible and doesn't require many additional costs.
I'm not frowning upon companies that don't scale well because they can generate a ton of revenue just not a ton of profits.
Google Scales Well (World Leader In Search) 2007 Revenue: $16.
6 Billion 2007 Profits: $3 Billion 2007 Profit Margin: 29% Adecco Staffing Doesn't (Leader In U.
S.
Staffing Industry) 2007 Revenue: $30 Billion 2007 Profits: $1 Billion 2007 Profit Margin: 3% Show Where The Money Will Be Spent Since your Angel is going to be writing you a FAT check, they kinda want to know where the money is going.
Prepare a spreadsheet that shows how the money will be spent by month over twelve months then by semi-annual intervals to 18 and 24 months.
No need to show expenses any further out because you probably won't have it and if you do, that means you've raised Venture Capital funding and you've been reading the wrong article.
If you can create a 10%-15% cushion in your ask to account for any unforeseeable bumps in the future.
Outline these main areas in your projections:
Your investment will probably be more than a couple thousand dollars so note that it will take at least 3-10 business days for your bank to actually transfer the funds to your business account.
Remember that this money is for business purposes only and that it really isn't your money.
At all costs, try not to blow it on personal items like a new car, home improvements or buying that new phone.
It's hard to resist spending a lot of cash when you get a lump sum, if you're worried about spending it talk to your bank about putting a portion of the funds into a short term Cash Deposit (CD).
This way you can save your investment and earn interest.
Now get to work!
Hopefully your business will never experience the latter, nonetheless capital is needed.
I've seen a ton of ways not to raise capital and finally myself have figured out the magic formula to actually raising it and I thought I'd pass it on to you.
Before we get into the specifics of approaching an angel investor, it's always good to know a little history about what you are doing.
The term "Angel Investor" was first used back in the early 1900's to describe wealthy businessmen that invested in unpopular Broadway productions.
Oftentimes these productions had no where to turn and when the investors stepped in they were looked at as "Angels".
In modern day, Angel Investors are wealthy businessmen (or women) who have at least $1 million dollars in net worth and an active income of over $200,000.
Not only do "Angels" invest but they also advise and leverage contacts from other business partnerships that were successful in the past.
So now that you know what "Angels" do, let's talk about getting them to write you a check.
Build Relationships Now Angels tend to be wealthier people who are or were active in business.
Think about everyone you know and make a list of everyone who is a potential investor in your idea or product.
Start with people who are closest to you like family and friends and then work your way out to mentors and then friends of friends and so on.
In the initial stages, Angels tend to be people who are within 3 degrees of separation or less from you.
If you cannot think of anyone who is a potential candidate or don't want to do business with anyone that close to you, checkout the Angel Capital Association website.
This is a great resource to find Angel groups across the entire country.
Building relationships isn't really that hard but there is one thing to avoid.
Never ask for money on the first meeting.
This is an easy way to turn off an "Angel" or anyone else for that matter.
Instead, talk about who you are and why you'd like to get to know this Angel (other than the fact they have a lot of dough) it's really good to know about some of the Angel's business accomplishments.
Always put yourself in the position to learn from the Angel.
Ask for feedback about yourself and slowly introduce the product, when the time is right (you'll know) make the pitch.
Unfortunately, this thing doesn't happen overnight.
Someone really has to trust you to write you a check, nonetheless you can do it.
Demonstrate Domain Knowledge Trust is very important when engaging an "Angel" so you have to demonstrate that you know every angle of the industry.
The best way to do this is to become the industry.
What I mean by this is that you need to read every market research report, acquisition announcement, news occurrence and even publish information yourself.
In doing this, you show the Angel that you are highly passionate and invested in the industry that you want to build a business in.
Spark conversations with the Angel about your industry while discreetly (and humbly) showing the Angel that you are very knowledgeable in all aspects of the industry.
If there are questions that you or your Angel can't answer make sure to research and submit the answers to the Angel.
This will show your resilience and ability to find less common information.
All of this activity quietly builds confidence in the Angel's eyes that you are a good bet.
Publicize Small Wins I've noticed that most people don't like to "toot" their own horn but when persuading Angels this is a must.
It's not that you are cocky, arrogant or even conceited but seeing that your relationship is still new with the Angel, you have to give them every reason to feel like you are positively different.
If you are a new entrepreneur, demonstrate what you were able to do with your company previously.
Maybe this was generating $5K in sales per month with an initial marketing budget of $100.
If your in the corporate world, maybe it's being named "Salesman of The Year" in your office.
If you haven't won any awards, get recommendations from your employer about your industry knowledge and work ethic.
Whatever it is, show that you are different and better than other startup owners your "Angel" knows.
Remember This: Investors Bet On The Jockey, Not The Horse.
Prove Scalability In Your Model There are a ton of good business ideas out there but one thing that stops them are their inability to scale.
So what does it truly mean to scale? Scalability occurs when a system (your startup) is built and as there are more "transactions" (sales, users, etc...
) costs remain relatively constant.
It is extremely important for Angels to see a scalable business model because that means that their is big profit potential in the future.
Technology companies (especially software) do this really well because the product for the most part is intangible and doesn't require many additional costs.
I'm not frowning upon companies that don't scale well because they can generate a ton of revenue just not a ton of profits.
Google Scales Well (World Leader In Search) 2007 Revenue: $16.
6 Billion 2007 Profits: $3 Billion 2007 Profit Margin: 29% Adecco Staffing Doesn't (Leader In U.
S.
Staffing Industry) 2007 Revenue: $30 Billion 2007 Profits: $1 Billion 2007 Profit Margin: 3% Show Where The Money Will Be Spent Since your Angel is going to be writing you a FAT check, they kinda want to know where the money is going.
Prepare a spreadsheet that shows how the money will be spent by month over twelve months then by semi-annual intervals to 18 and 24 months.
No need to show expenses any further out because you probably won't have it and if you do, that means you've raised Venture Capital funding and you've been reading the wrong article.
If you can create a 10%-15% cushion in your ask to account for any unforeseeable bumps in the future.
Outline these main areas in your projections:
- Sales
- Personnel
- Marketing
- Infrastructure
- Legal
Your investment will probably be more than a couple thousand dollars so note that it will take at least 3-10 business days for your bank to actually transfer the funds to your business account.
Remember that this money is for business purposes only and that it really isn't your money.
At all costs, try not to blow it on personal items like a new car, home improvements or buying that new phone.
It's hard to resist spending a lot of cash when you get a lump sum, if you're worried about spending it talk to your bank about putting a portion of the funds into a short term Cash Deposit (CD).
This way you can save your investment and earn interest.
Now get to work!
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