when and how to pitch angel investors for your business

When it comes to raising money for your startup, don't expect any miracles: Angels don't descend from heaven. In most cases, angel investors will already know you or be introduced by a mutual friend. This is partly because they need to have confidence and trust in you to take a risk on you and your business, but also because they simply like hanging out with entrepreneurs. Angel investors like being mentors, and they typically like to experience the entrepreneurial life vicariously.

Why do they want to hang out with you? Angel investors learn about you by being as interested in you personally as they are in what your business does or sells. If they don't already know you--that is, they're neither your friends nor members of your family--they'll ask around about you behind your back. They'll see what kind of car you drive and if and where you take vacations. Their impression of you, as well as your business experience and your management skills, are all critical to their decision to invest. They'll also talk to mutual associates to get the inside skinny on you--if people they know and trust say you're a genius but lousy with money (or something equally frank), they're likely to listen closely.

And angels are interested not just in you; they also want to know about your team. They want to get to know the people working with you and see that you've gathered an experienced and innovative management team to help you grow your business.
Scheduling a Meeting

You'll need to weigh three factors to help you decide when to schedule the meeting where you'll ask the angel for the investment:

1. State of your relationship with the angel investor. The right time to ask for money is when your relationship is comfortable and trusting and when you sense the investor will be open to the request.

If the investor is a friend or family member, you should have a good sense of their personal life. For example, if there are any big life events like a move, a marriage or a new baby coming up, it's probably not the best time to ask for money. If the investor is unrelated, you'll be best served to make contact and have at least two or three social interactions with him or her before asking for money--unless of course you're lucky enough to have a strong introduction from a close friend of the investor--preferably one who's already invested in your business--that is specifically intended to help you schedule a meeting to ask for money.

In each case, the investor should know you have a business plan and be curious to hear more before you suggest a meeting about capital-raising.

2. Cash needs of your business. A useful calculator for estimating your company's cash needs is available on our site here. It will take, at a minimum, many months to close on your round of fundraising, so you'll need to understand your cash flow well enough to plan several months in advance for how much you'll need and when.

3. Time it'll take to close the deal. It takes time to raise money from relatives, friends and angel investors--just like it takes time to raise money from venture capitalists. Entrepreneurs expect it to take six to 12 months to close a round of venture capital. For raising money from relatives, friends and angels, it could take as little as three months to close a round from five to six investors. For raising a larger round from 10 to 15 investors, it could easily take well over 6 months.

Why does it take time? Because you're not just trying to raise money for your business. You're also trying to run your company. And the investors have other things going on as well. Scheduling meetings, communicating, coordinating schedules, drafting documents--all these things take time. You might be able to impose closing dates on VC investors who are investing out of fear of losing the deal, but imposing deadlines on angel investors is notoriously difficult.
Goals for Your Meeting

You have two goals for your "money raising" meeting with an angel: First, you want to share your business idea, and second, you want to achieve a nonbinding agreement, verbal or written, to invest. If you can't end with an agreement to invest, end the meeting with a plan to follow up.

Goal #1: Communicate your business idea. When you ask for equity capital, you really must have an articulate business plan in place for two reasons. First, you need to be able to answer certain important questions about your idea. One popular one is, "When will you make a profit?" The answer to this should be in the cash flow projections of your business plan.

Second, a smart equity investor will nearly always ask to see a copy of your business plan. My advice is, unless they ask for it in advance, don't bring your full plan to the meeting. When they ask about it at the meeting, you can provide them with a plan summary and offer to mail the complete plan to them afterwards. There are two reasons for this. If you have the full plan on hand, you may get bogged down in the details related to the presentation of the plan or some information within it. Also, it's excellent fundraising practice to have a reason to contact the investor after the meeting.

In addition to your business plan, you'll be talking about your idea in general. Here are the three items that, in my experience, you'll need to know for certain before you go into a meeting with a potential investor:

* What it takes to get to profitability. Investors will want to see that you've "crunched the numbers" and made a plan for success.

* What skills you're lacking and which types of people and skill sets you'll need to have. Good leaders have the confidence to surround themselves with smart people who together make a great team. Show your investor that you know this and have a plan in place to bring on board the people needed to make your business a success.

* How your personal finances relate to those of the business. Investors don't want to hear that you're starting a business so you can spend more time at home with your kids. They don't want to see you driving around in a luxury car or dropping cash like it's going out of style. They want to know you'll be the one sweeping the floors after everyone else goes home at night. They want to know you're willing to sacrifice--to scrimp and save--to make the business succeed. They know it's hard work to create and run a successful business, and they expect you to do what it takes to make them a lot of money.

Talking to your equity investors can be nerve-wracking. Although the benefit of having a relationship is that you and your investor already have a certain level of trust established, you should still choose your words carefully. In addition to the tips I offered in my previous article on the kitchen table pitch, you should also avoid saying the following to your investor:

* That you have big plans for the future. Big plans--for example, to turn your startup chocolate pretzel store into the next big franchise--may appear vague and overly ambitious. Your investor expects you to be a visionary, but also to achieve the short term financial projections that will earn both of you a lot of money.

* Anything that appears cagey or dishonest. Honesty is the most important value investors can find in an entrepreneur, and your investor will be trying to assess your degree of honesty from day one. Avoid the temptation to puff up your projected profits or your colleagues' resumes beyond the bounds of reality.

Goal#2: Get to "yes." The goal of your meeting with the angel should be to reach a verbal agreement to invest. In the case of equity investing, because the deal will be more complex than a loan, you can approach this in two ways: with a handshake or with a "letter of intent."

With most family and friend investors, you can proceed from a nonbinding agreement, such as a handshake, straight to a legally binding agreement. But it's rare for a deal to come up and close in the same meeting, so don't expect to ask for and receive the money in one sitting. Aim to get agreement on a range--such as "I could do $25,000 to $50,000"--and that you'll send the paperwork. If you've gotten this far, you're in great shape. All that's left is to follow up by drafting and sending the agreement.

For unrelated angel investors, especially those who are notoriously difficult to pin down, aim to get the investor to sign a letter of intent (LOI) at the meeting. Although the letter will be informal and nonbinding, it's a great way to get the investor to agree to the idea of making the investment. Follow up promptly with the legally binding stock purchase agreement. The LOI is a tool to get you a commitment from an investor at the moment when he or she is most excited about the business. A signed LOI also allows you to nudge other investors by letting them know you already have money committed.

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How to use Federal Government to Fund your Business.

SBA-licensed one-stop funding shops SBICs and SSBICs are looking for businesses to fund. Could your business be next.

What It Is: Small Business Investment Companies (SBICs) and Specialized Small Business Investment Companies (SSBICs), which target entrepreneurs who have been denied the opportunity to own a business because of a social or economic disadvantage, are licensed by the Small Business Administration (SBA). These investment companies have their own private capital of several million dollars and may borrow additional funds from an SBA-sponsored trust at favorable rates. SBICs tend to be more risk tolerant than banks or regular venture funds, specialize in a particular industry, and target young companies that aren't ready for a traditional venture deal.

Appropriate for: Companies that are capable of repaying a loan. This typically means established to early-stage companies with good sales and earnings, or companies about to turn the corner toward profitability.

Supply: SBIC financing is abundant. According to the National Association of Small Business Investment Companies, there are more than 400 SBICs and SSBICs with more than $21 billion under management.

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Best Use: For activities that generate cash flow in a relatively short period of time, such as product rollout, or for additional manufacturing or service capacity for which there is a demand.

Cost: Expensive. SBICs and SSBICs charge interest, but in addition, many look for some kind of equity compensation in the companies they finance. This equity compensation is usually in the form of stock, as well as options or warrants that allow the holder to buy stock at predetermined prices for a predetermined period of time.

Ease of Acquisition: Challenging but attainable because the company must submit itself to traditional credit analysis to prove it can repay a loan. This difficulty is countered by the fact that these investment companies are hungry for new business and can be helpful in shepherding companies through the application and due diligence process. In addition, an SSBIC or SBIC generally represents a one-stop shop, and companies need only satisfy the requirements of this single investor to obtain funding.

Range of Funds Typically Available: $150,000 to $5 million.

First Steps
The affiliation SBICs and SSBICs have with the federal government through their SBA license tends to mislead many entrepreneurs. This is because many labor under the mistaken idea that there is an arm of the government that gives money to businesses that cannot secure financing from traditional sources of capital. Unfortunately, SBICs and SSBICs are not this elusive Holy Grail. Second, many entrepreneurs believe that the SBA, through a mechanism such as an SSBIC or SBIC, lends money to businesses with no visible source of repayment.

Unfortunately, this is not the case; SBA-licensed investment companies tend not to finance companies that do not exhibit an obvious source of repayment or that show a high degree of risk.

In fact, briefly exploring the financial structure of these SBA-licensed investment companies is helpful because it shows not only the kinds of deals they won't do, but the kinds they will, and what types of companies should spend their time pursuing this option.

For example, Freshstart Venture Capital Corp., an SSBIC in New York City, gets its money from two places. The first is equity capital, which Freshstart founder Zindel Zelmanovitch raised from public and private investors. But the second and far more substantial source of capital for Freshstart is funds from an SBA trust fund.

The interest Freshstart must pay on the funds it borrows, as all SSBICs and SBICs do, means the investment company must become involved in deals in which it receives interest as well. Otherwise, there is a massive mismatch between the investment company's sources and uses of funds. After all, how can an SBA-licensed investment company make investments in which it receives no interest but still pays interest on its own borrowings? The answer is investment companies can't because the difference between the interest they pay and interest they receive is precisely how it makes money.

And because their cost for funds can be quite low--from 4 percent to 7 percent--and the price SBICs and SSBICs charge on loans can be quite high--from 9 percent to 17 percent--these lenders can be pretty profitable. Freshstart, for instance, earned about $781,000 on about $1.8 million in interest income for the 12 months ending November 30, 1997.

If SBA-licensed investment companies are primarily lenders, what makes them different from a bank? There are two differences, really. First, SBICs and SSBICs tend to take slightly more risk than a bank in terms of collateral. That is, whereas a banker needs a loan to be fully collateralized, and/or guaranteed, at an amount that is equal to or greater than the loan value, an SSBIC or SBIC may not. Most investment companies specialize in a particular industry. As a result of their specialized focus, they tend to assign higher values to collateral than does a general commercial lender.

Second, SBICs and SSBICs take a larger interest in smaller loans that range from $150,000 to $1 million. Large commercial banks like to make large loans. It's that simple. The systems these banks have installed to analyze, disburse and monitor loans are so expensive that for many, a large loan is the only way they can hope to make money.

By contrast, many SBICs and SSBICs are smaller partnerships. They have limited capital and are careful not to make investments that will outstrip their financial resources. Some SBICs, however, are affiliated with large commercial banks. These SBICs are capable of making substantial loans, and many have investment minimums of $1 million.

To find SBICs and SSBICs in your area, The National Association of Investment Companies (NAIC) in Washington, DC, represents SSBICs as well as other investment companies focusing on minority investments. The NAIC doesn't have a referral service but sells its membership directory for $35. Or try the National Association of Small Business Investment Companies (NASBIC), a trade group that consists of SBICs and SSBICs exclusively.

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The Lazy Man’s Way to Attract VC Investors.

Have you ever been to a conference where selected entrepreneurs are invited to present their ideas to a panel of investors who then critique their chances of getting funded? If not, then you've really missed out--these meetings are probably one of the best ways aspiring entrepreneurs can get a glimpse of what professional investors are looking for in what they call a "fundable company."

Recently, the Software Council of Southern California asked if I'd like to attend their event, VentureNet, to see what the latest trends were. I eagerly accepted, but my interest was not so much in what was going on at the stage level, but in picking the brains of the professional investors to see what they'd say "behind the scenes." Now, before I share what I learned, let me just make a few qualifying statements:

1. Every professional investor has a slightly different perspective on what's important. Yes, there are some things we all seem to emphasize, but our differences can be extensive. Thus, this article represents the opinions of just the particular cross-section I happened to interview on this one occasion.
2. The individuals I interviewed were very candid and, to protect them from being "profiled" with any one statement, no direct quotes will be made.

The professional investors offering opinions from which this article was extracted include: David Cremin, managing director of DFJ Frontier; Michael Song, a partner with Rustic Canyon; Bill Collins, managing partner of Publex Ventures; and Robert Kibble, managing partner of Mission Ventures. Some additional comments and insights were also provided by Jon Kraft, chair of the Software Council of Southern California.

So what do these gentlemen prefer to see in a company before they get excited enough to write a check? What, if anything, has changed from what they used to look for during the dotcom craziness of the late 90s?

Here's what they said is important now:

Seasoning. They're looking for more experienced, older entrepreneurs who have "been there, done that." The time of investing in the 19-year old kid who's a tech-genius isn't necessarily gone, but the kid had better be able to find an older, seasoned executive to join his team.

Customers. Contrary to putting the emphasis on the team or the revenue numbers, there seemed to be a new emphasis on the customer:

* What compels them to buy this product or service?
* What problems does this product or service solve? Why is it better than the alternatives?
* Why is it worth the price?
* Does it compel you to tell others about your experience?
* Are your customers asking if they can invest in your company?

Team. The team is still an important part of the equation, but the entrepreneur is just as important. Here's what the investors are looking for in both:

* Passion: The entrepreneur must demonstrate a contagious excitement about their vision for the company.
* Tenacity: The entrepreneur must prove they have the stamina and willpower to stay with their vision through thick and thin.
* Flexibility: The entrepreneur must be willing to reevaluate and refocus their plans when things don't work out as anticipated.
* Commitment: The entrepreneur must be willing to invest enough of their own money into this project to convince investors they're serious.
* Teamwork: The entrepreneur's team must prove they can work effectively together.
* Coachability: The entrepreneur and their team must be coachable. No team knows everything they need to know to succeed.
* Knowledge: Investors prefer to back teams that really know their market by having backgrounds that are rich and impressive in the market niche for which the company is engaged.

Opportunity. Investors want big ideas. Ideas that can change the world. Ideas that change our behavior, culture or way of thinking. Ideas that can build $100-million-size companies. Anything less is too speculative. The risks of investing in a company are so great--and the chances of a reward so small--that investors can't afford to bet on opportunities that won't surely have huge payoffs. And one of the biggest problems when addressing opportunity is "Am I too early?" Investing in a huge opportunity five years before the market will recognize and embrace it is a very frustrating thing. Not only will you lose your investment, you'll have to suffer the extreme frustration of watching someone else make a lot of money on the foundation you helped build.

Business Model. Will the numbers map out? In other words, once someone takes a sharp pencil and starts tracing where every revenue dollar comes from and then seriously challenges every expense it'll take to generate that revenue dollar, will you have:

* a profitable model?
* a repeatable model?
* an expandable model?
* a predictable model?
* a defensible model?

Many an entrepreneur fails because they don't know how to do this type of exercise with a "real world" view.

Well, there you have it: the latest and deepest thinking from a sample of professional investors. How do you and your company match up? If you were honest and found areas that were lacking, please find someone who can help you fix them before you approach anyone to invest. Your extra investment of time will significantly improve your chances for funding.

Jim Casparie is the "Raising Money" coach at Entrepreneur.com and the founder and CEO of The Venture Alliance, a national firm based in Irvine, California, that's dedicated to getting companies funded.

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How to Angel Investors to fund your startup.

Angel Investors.

These individual VC investors seem like they're from heaven, but be prepared to give up a chunk of your company for funding.

Definition or Explanation: Working with angel investors means acquiring venture capital from individual investors. These individuals look for companies that exhibit high-growth prospects, have a synergy with their own business or compete in an industry in which they have succeeded.

Appropriate For: Early-stage companies with no revenues or established companies with sales and earnings. Companies seeking equity capital from angel investors must welcome the outside ownership and perhaps be willing to relinquish some control. To successfully accommodate angel investors, a company must also be able to provide an "exit" to these investors in the form of an eventual public offering or buyout from a larger firm.

Supply: The supply of angel investors is large within a 150-mile radius of metropolitan areas. The more technology driven an area's economy, the more abundant these investors are.

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Best Use: Runs the gamut, from companies developing a product to those with an established product or service for which they need additional funding to execute a marketing program. Also, angel investors are appropriate for companies that have increasing product or service sales and need additional capital to bridge the gap between the sale and the receipt of funds from the customer.

Cost: Expensive. Capital from angel investors is likely to cost no less than 10 percent of a company's equity and, for early-stage companies, perhaps more than 50 percent. In addition, many angel investors charge a management fee in the form of a monthly retainer.

Ease of Acquisition: Angels are easy to find but sometimes difficult to negotiate with because they usually do not invest in concert and may demand different terms.

Range of Funds Typically Available: $300,000 to $5 million.

First Steps
Angel investors are at once difficult and easy to find. The situation is analogous to searching for gold. Generally, it's difficult to find, but once you hit a vein...all your hard work pays off in a big way. Here are the places angels might be hiding:

* Universities: According to Bob Tosterud, Freeman Chair for Entrepreneurial Studies at the University of South Dakota, angel investors tend to hover near university programs because of the high level of new business activity they generate. He advises that if you are looking for money, call the nearest university that has an entrepreneurship program, and make an appointment to speak with the person who runs it. Generally, he says, such people can point you in the direction of angels.
* Business incubators: According to the National Business Incubation Association (NBIA), there are about 1,000 business incubators in North America. At first blush, incubators appear to be the mere bricks and mortar facilities that offer entrepreneurs reasonable rents, access to shared services, exposure to professional assistance and an atmosphere of entrepreneurial energy. But according to NBIA president and CEO Dinah Adkins, many business incubators offer formal or informal access to angel investors.
* Venture capital clubs: The tremendous wealth created through the commercialization of technology, as well as the robust stock market of the 1990s, have resulted in a large number of angel investors who have begun to formalize their activities into groups or clubs. These clubs actively look for deals to invest in and their members want to hear from entrepreneurs looking for capital.
* Angel confederacies: Some angels, shunning the formality of a venture capital club, band together in informal groups that share information and deals. Members of the group often invest independently or join together to fund a company. So-called confederacies are not easy to find, but once you locate one member, you gain access to them all, a number that could top 50 investors.

Here are 10 action steps you can take to find angel investors in your area:
1. Call your chamber of commerce and ask if it hosts a venture capital group. Many such groups have a chamber affiliation.

2. Call a Small Business Development Centernear you and ask the executive director if he or she knows of any angel investor groups. Ask the SBA if you don't know where an SBDC is.

3. Ask your accountant. If your accountant doesn't know, call a Big Four Accounting Firm and ask for the partner who handles entrepreneurial services. Ask him or her to point you in the right direction.

4. Ask your attorney. Lawyers always know who has money.

5. Call a professional venture capitalist and ask if he or she is aware of an angel investor group.

6. Contact a regional or state economic development agency and ask if anyone there knows of an angel investor group.

7. Call the editor of a local business publication and ask if he or she knows of any groups. These professionals often write about such activity.

8. Look at the "Principle Shareholders" section of initial public offerings (IPO) prospectuses for companies in your area. This will tell you who has cashed out big.

9. Call the executive director of a trade association you belong to. Ask if there are any investors who specialize in your industry.

10. Ask your banker. If you do business at a small bank, ask the president of the institution. If yours is a larger commercial bank, ask your lender. If you do not have a lender, ask for a lender who works with loans of $1 million or less. A good small-business banker knows of such groups because companies that have received an equity investment are good candidates for a loan.

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10 Lies VCs Know You're Telling

10 Lies VCs Know You're Telling.

1. “Our projections are conservative.” An entrepreneur’s projections are never conservative. If they were, they would be $0. I have never seen an entrepreneur achieve even their most conservative projections. As a rule of thumb, when I see a projection, I add one year to delivery time and multiply by 0.1.

2. “(Big-name research firm) says our market will be $50 billion in 2010.” Even if the product is bar mitzvah planning software, every entrepreneur claims the market potential is tens of billions. Do yourself a favor: Remove any reference to market size estimates.

3. “(Big-name company) is going to sign our purchase order next week.” Only play this card after the purchase order is signed, because no investor will fall for this one.

4. “Key employees are set to join us as soon as we get funded.” When a venture capitalist calls these key employees, he usually gets the following response: “I recall meeting him, but I certainly didn’t say I would leave my $250,000-a-year job to join his company.” If key employees are ready to rock ’n’ roll, have them call the venture capitalist and confirm it.

5. “No one else is doing what we’re doing.” Well, either there’s no market for it, or you’re so clueless that you can’t use Google to figure out you have competition. Neither a lack of a market nor cluelessness is conducive to securing an investment.

6. “No one else can do what we’re doing.” The only thing worse than cluelessness and the lack of a market is arrogance.

7. “Hurry, because several other vc firms are interested.” There are maybe 100 entrepreneurs in the world who can make this claim. The fact that you’re reading this article means you’re not one of them.

8. “Oracle is too big/dumb/slow to be a threat to us.” There’s a reason Larry Ellison is where he is, and it’s not that he’s big, dumb and slow. Entrepreneurs who utter this lie look naive at best, stupid at worst.

9. “We have a proven management team.” If you were that proven, you wouldn’t be asking for money. A better strategy: State that you have relevant experience, you’ll do whatever it takes to succeed, you’ll surround yourself with proven advisors and you’ll step aside whenever it becomes necessary.

10. “All we have to do is get 1 percent of the market.” First, no venture capitalist is interested in a company that wants just 1 percent of a market. Second, it’s not easy to get even 1 percent, so you look silly pretending it is. Instead, show an appreciation of the difficulty of building a successful company.

“Empower entrepreneurs” is Guy Kawasaki’s mantra. He is former chief evangelist for Apple Inc., co-founder of VC firm Garage Technology Ventures and author of eight books--most recently,The Art of the Start. Visit his blog athttp://blog.guykawasaki.com.

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