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Find Angel Investors

Mon, 17 Oct 2011 17:33:00 GMT

Find Angel Investors

If you want to find angel investors that make sense for your deal, the best way to start is to search by the proper criteria. Angel investors, much like venture capital firms, like to find startup and early stage opportunities that existing within areas they are most comfortable making investments.

The more time you spend to help find angel investors that are very well targeted, the more likely you’ll be to get a good response rate.

All Angel Investors are NOT the same!

Angel investors come in lots of flavors. Some are focused on really early stage opportunities when the company is just an idea on the back of a napkin. Others are looking for companies that already have some market traction and have already proven they are on a hot streak. You’ll want to make sure you do as much of your homework as possible to find angel investors that write checks for exactly what you do.

Find Angel Investors by Industry

The first place to start is by filtering through the industry or market you currently serve. Generally speaking, angel investors follow particular industries as their first filter. That means if you are looking to find angel investors for a real estate deal, you’re best bet is to filter out those who have no interest in that market. You’d be wasting your time trying to pitch angel investors on an industry they don’t serve.

We like to use “industry” as the first filter, realizing that a particular industry can have lots of “markets” within it. For example, “technology” is a commonly addressed industry among angel investors however there are dozens of individual markets including software, Internet, hardware, and others. Even within those markets they can sub-divide more.

The more specific you can make your search to find angel investors that are a clear fit for your deal the better. Using our search, start filtering by industry and then worry about the rest of the filters later.

Find Angel Investors Near You

After you’ve narrowed your search to find investors by industry, you’ll then want to sort the list by those who are closest to you. You can do this easily by typing in your zip code which will scan the angel investor network for those investors who are in your area.

You’re certainly not limited to talking to local angel investors, but they will most likely be your most likely candidates for capital. Angel investors certainly write checks to companies outside of their region, but it’s less common. They tend to source deals that are close to them where they can meet with the entrepreneur as needed by just hopping in their car.

Some angel investors will have specific local criteria to let you know that they do not invest outside of a particular area. In that case it’s best to spend a little bit of time on their online profile to get a sense for how they work. Your time is as valuable as theirs, so there’s no point in reaching out to people that don’t invest in your area, and chances are you’re not going to relocate to meet their funding criteria (that’s rarely a good idea).

Find by Funding Amount (Deal Size)

Not every angel investor funds the same size of deals. Some may invest very early on, but only invest up to $25,000 with a single check. This is most common of individual angel investors who are investing personal capital in a very small number of deals.

As you start to move up the chain of angel investors, particularly when you get to pools of capital committed by an angel investor group, you’ll find those that invest up to $2 million of capital, although that tends to be on the very high end. After $2 million you tend to be in the range of what venture capital firms invest, which is a totally different class of investor.

Dig into their Portfolios

Angel investors don’t typically publish the range in which they invest the way venture capital companies do, so it may be difficult to assess whether the angel investor you’re about to reach out to makes sense for you. In that case it may be possible to do a little research on the portfolio investments they have made to see if they have previously written checks for deals like yours.

Each investment the angel investor has made tells you a lot about their investing preferences not on just funding size, but also on the markets they get excited about. The best thing you can do is reach out to an angel investor with a little inside knowledge and say “I see that you’ve invested in Widget Worx, Inc. - we have an opportunity that serves a similar market that we think you might like.” The more relevant you are, the better off you’ll be.

Rank Angel Investor Search Results

The final step once you’ve found angel investors that fit your criteria is to figure out how to rank your results. You’ll want to start by contacting your most relevant matches first. And most importantly, you’ll want to take your time in reaching out to them so that you can get some feedback from one before you reach out to another.

We’ve written an entire section on everything from pitching angel investors to the entire angel funding process, so we’d recommend you read that before contacting anyone. But for the time being as you’re doing your angel investor research, you’re best off starting with those that are as close to a fit as possible.

Find Angel Investors by Industry & Location

How to Contact Angel Funding Sources

Fri, 14 Oct 2011 20:59:05 GMT

Once you’ve narrowed down the list of angel funding sources to those that you want to contact right away, it’s definitely worth your while to spend time getting your introductions done well.

Anyone in the angel funding business can tell you they get contacted and pitched non-stop – and it’s usually starts with some painful introductions coming from entrepreneurs trying to throw sales pitches at the angel investor instead of a well-written elevator pitch.

Start with Personal Introductions

The best way to contact any of your angel funding sources, or just about anyone for that matter, is through a personal introduction from someone you both know. Angel investors are people just like you, and like you they put a great deal of weight on introductions that come from people they already know and trust before they want an introduction from a total stranger.

You may not even realize that you have a mutual friend who could potentially make the introduction for you. But in the age of social networks, it would certainly behoove you to start there. There is some point at which the introduction doesn’t even hold up anymore. If you’re going to ask your uncle Louie to make an introduction to an angel investor who he met one night at a party three years ago, that might not be that helpful.

But if you can find someone who has worked with the angel investor in some meaningful capacity before, that is a much better way to get started. Angel Investors rely heavily on their social networks to find quality deals that come from trusted connections, so you’ll always be best off starting with those introductions.

If that Doesn’t Work, Send a Well-Written Introduction

Inevitably there will be some angel investors that you’ll want to contact that you don’t have any connection to. That’s fine, most people aren’t highly connected to Angel Investors.

Without the benefit of a warm introduction you’re still going in cold. But there are better and worse ways to make that introduction.

A well-written introduction to any of your angel funding sources will start by trying to make the first few sentences personal. Do a little homework on your customer. Find out what they have invested in before and where their interests might lie. You’re looking for a connection that shows “hey, I’ve spent some time thinking about you and I think this is where we might be a good fit for each other.”

You’re just looking for a basic connection for common ground, that’s all. You don’t need to overthink it, but also don’t overlook the importance of making the introduction personal.

Drop the Sales Pitch

We’ll often refer to the “elevator pitch” that explains what problem you solve, how you solve it well, and how big of a market that problem affects. That’s not the same as a sales pitch.

Here are the differences:

Sales Pitch: “We’re going to be the biggest site for anyone who watches movies!! This opportunity will be bigger than Facebook and is a sure thing!!”

Elevator Pitch: “We’re an online dvd rental business. We help consumers avoid the hassle of going to the video store to rent movies by delivering them to their mailbox for a monthly fee.” (Netflix.com)

Angel investors are smart people – they know how “big” an opportunity is when you explain what problem you solve and how you solve it well. They don’t need to be sold on the opportunity. They need to be convinced that the product is important.

The worst thing you can do is come across like a cheesy car salesman (no offense to honest, well-intentioned, straight talking car salesman). State what you do and the market size that you’re tackling. If that doesn’t explain it, you’ve got a problem with your elevator pitch, not your sales pitch.

Wait for Responses before Emailing more Angel Investors

The most important aspect of contacting potential angel funding sources isn’t sending out lots of emails – it’s the response you get from the first person you reach out to. Your elevator pitch is something you’ll want to iterate on lots of times, so before you send everyone a version that “can’t miss”, send it out to one or two investors and see how they react.

You could easily go through 10 revisions of your pitch before you find a version that investors react positively to. If you contact every one of your leads with the same pitch, you’re going to lose the chance to get it right.

What to Expect Back

Angel investors are busy like anyone else. If you don’t get any response from them within a week, it’s OK to send your pitch once more, preferably with a quick note at the beginning that reads “Jim, I sent you a copy of this on January 3^rd, but wasn’t sure if you received it. If so, no problem, I’m just being thorough).” Not too many people are going to fault you for being “thorough”. Just don’t keep sending more emails after that. There’s a thin line between thorough and being a stalker.

The angel investor will most likely request more materials from you before they meet with you in person. Don’t worry about being coy and only “sending a teaser”. You’re more likely to strike out sending too little information than you are the right information they are asking for. In most cases an Executive Summary or Pitch Deck will suffice. No one has the time to read your 50 page business plan.

Common Angel Investment Terms

Fri, 14 Oct 2011 20:53:00 GMT

Common Angel Investment Terms

There are only a handful of common angel investment terms that you should be familiar with before you go out looking for capital.

Angel investors will generally be pretty forgiving if you don’t know everything there is to know about structuring an angel investment deal or reviewing a term sheet. So don’t get too worked up if you don’t know the details here (why would you?).

All that being said, there are a handful of common angel investment terms that you should be familiar with because they will have a material impact on how your deal looks. As long as you understand the basic concepts, you’ll be in great shape.

Seed Capital (Stage)

Just like it sounds, seed capital is the initial capital that funds a business. Seed capital typically comes from the founder of the company and his or her friends and family.

A seed stage is the first round of capital that is put into a business. This refers to a round that comes before any large investment rounds have been taken on. It is often during the pre or low revenue stages of a company. The capital is typically used to help generate more traction on a prototype or service until it can attract VC's.

Valuation

The valuation of your company represents how much someone other than you thinks it’s worth. We say “someone other than you” because while you may be the person who sets the valuation, until someone else agrees that the prices is valid, and writes you a check based on that valuation, it’s not validated.

Valuation will be the most common term you hear among angel investors. There are two ways the valuation is represented:

Pre-Money Valuation: This is how much the company is worth before the angel investor puts money into your company. So if you set your valuation to be $2 million, and the angel investor puts in $500,000, your pre-money valuation is $2 million.

Post-Money Valuation: This is how much the company is worth after the angel investor puts money into your company. So if you set your valuation to be $2 million, and the angel investor puts in $500,000, your post-money valuation is $2.5 million. You just tack on their investment to the valuation.

Term Sheet

A term sheet is simply a non-binding outline of the terms and conditions in which an investment is to be made. It’s similar to a Letter of Intent in that it indicates a strong interest to move forward, but it’s not the same as guaranteeing an actual deal gets done.

Convertible Note

A convertible note is a loan made to a company that can be converted into stock by the choice of the issuer or holder at certain events. Each note has an interest rate, a maturity date, and may come with the option to convert at a discount at a future round or time.

Dilution

The effect of giving someone else part of the company's stock is considered "dilution". It means that you are diluting your equity stake to make room for someone else. When you're worried about "giving away the company" that's called dilution.

Cap Table

It's short for the "Capitalization Table" and means a detailed list of exactly how much stock each entity or person owns. Think of it like a spreadsheet that simply lists names and percentage ownership stakes all adding up to 100%.

Common & Preferred Stock

There are many "classes" of stock that can be issued in a company. Each class may have its own rights and preferences. Investors typically get Preferred Stock which may give them preferences such as the ability to get their investment back first before the rest of the Common Stock holders get their proceeds. Founders and Employees are usually left with Common Stock which typically means you're the last person to get paid.

Vesting

Vesting is a process by which you "earn" your stock over time, much like you earn your salary. The purpose of vesting is to grant stock to people over a fixed period of time so they have an incentive to stick around. A typical vesting period for an employee or Founder might be 3 - 4 years, which would mean they would earn 25% of their stock each year over a 4 year period. If they leave early, the unvested portion returns back to the company.

Stock Option Pool

When a company takes on an investment, the investor will usually request (read: insist, strong arm, force, drop kick) that you allocate a certain percentage of the company's shares to a Stock Option Pool for future employees. This sounds all well and good, but it comes out of your portion of the stock, not the investors. Stock Option Pools will range from as little as 5 points of equity to as much as 20 points.

The Least you need to Know

You’re not going to be expected to know every last investment term there is, but if you have a working knowledge of the terms here, you’ll be in good shape. Later on when you get a term sheet and start getting into the details of things like “pro rata rights” and “preferred stock” you’ll be sitting across from an attorney going into more detail.

Angel Investment Deal Structures

Fri, 14 Oct 2011 20:45:00 GMT

Angel Investment Deal Structures

Like doing any deal, angel investment deal structures are all about creating a win-win situation. Once you get an Angel Investor interested in your deal and agree on basic terms, you will need to discuss the best way to structure the investment.

This is a critical juncture in every startups evolution as the provisions you agree on here will be carried with you for the life of the deal.

Be Cautiously Optimistic

At this stage, many entrepreneurs get so excited that they forget to dot the i's and cross the t's on their deal. Make sure you thoroughly review any term sheet with a lawyer to make sure you completely understand the deal structure and terms. The best way to do this is by proposing deal structures that you have already come up with.

The Two Most Common Deal Types

There are two primary types of seed stage angel investments – an Equity Stake and a Convertible Note. Yes, there are more fancy types of structures but chances are you’re going to be talking about one of these instruments.

In either case you’re deciding how much equity the investor will get for their investment. The difference between the two is when you make the decision on how much equity will be decided upon. The Equity Stake (which isn’t really an instrument, it’s just what we’re calling it) is simply you making the determination now. The Convertible Note (ok, that’s a real term) suggests that you’ll both agree that the valuation will be determined at some later date based on a few criteria.

Equity Stake

An equity stake is exactly what it sounds like. This is when an investor exchanges their money for ownership interest in your company. The amount of equity the investor receives will depend upon the valuation that you agreed up on with the investor. So if you valued the company at $1,000,000 and the investor put in $150,000 of cash, they would get 15% of your company.

From there it can get really complicated if you want it to. You can start to issue different classes of stock, some which have voting rights or some that get paid back more quickly than others. Suffice to say if you make it far enough to start having conversations with those details, it pays to get a lawyer involved because the variations on those provision can be significant and you can’t afford to not understand what’s being proposed.

Most deals will be setup as an equity stake in exchange for cash.

Convertible Note

Sometimes the investor and the entrepreneur cannot agree on exactly what valuation the company has today. In that case, they may opt to issue a Convertible Note that basically lets both parties set the value of the company at a later date, usually when more outside money comes in and values the company then.

A convertible note is setup as a loan to the company. So if the investor put in $150,000 as a convertible note, it would mature (come due) at a specific date in the future, let’s say a year from now. During that time it will likely accrue interest. At the maturity date in the future, the investor can choose to either ask to be repaid back in cash (like a loan) or convert that money back into the company as equity based on a valuation determined at that time.

Convertible notes have become more popular with angel investors as well as entrepreneurs over the years because it aligns both parties with the goal of maximizing the investment. If a year from now the company does extraordinarily well and raises a professional round of venture capital at a high valuation, the capital invested turns into a relatively small equity stake. That’s not all bad for an investor either since it at least means the deal has value.

On the other hand if the company stalls, the valuation in the market could be much lower than the investor would have gotten at the time they made the deal, in which case they would get more equity for their same capital investment. This also isn’t necessarily a great deal for either party because it means the company is worth less.

The Term Sheet

Once you have agreed on the amount and structure of an investment, you will receive a term sheet from or provide one to the investor. A term sheet is simply a non-binding document that outlines the terms and conditions in which an investment is to be made. Through all of this pitching, what you’re looking for is a term sheet. It doesn’t mean you’ve got money in the bank, but it at least signals that the investor is serious about getting a deal done.

It Ain’t Done til it’s Done

The most common mistake first time entrepreneurs make is thinking that a done deal is a done deal. It’s not.

Even getting a term sheet isn’t the same as finalizing the closing legal documents that the term sheet outlines. This involves a great deal of back and forth between the attorneys from both sides and can easily take 30 – 60 days to complete if it gets done right. If it goes over 90 days that’s not too unusual but if it starts dragging over 120 days it runs the risk of blowing up.

Do not get cozy when you see a term sheet. Realize that it only means there is serious interest. You can’t rest until the check is in the bank. And even then, the work just begins!

How to Pitch Angel Investors

Fri, 14 Oct 2011 20:40:00 GMT

How to Pitch Angel Investors

It’s not that hard to figure out how to pitch angel investors properly. Most of it comes down to common sense and just treating angel investors the way you would want to be treated.

Despite what you may think, if you want to pitch angel investors you’re not expected to go through some elaborate sales routine. It’s a matter of presenting great information in a compelling way, but doing so honestly and with compassion.

Start with the Elevator Pitch

The first thing you’re going to send to angel investors is your elevator pitch. Your elevator pitch isn’t a sales pitch. It’s a short, well-crafted explanation of the problem you solve, how you solve it, and how big of a market there is for that solution. That’s it. You don’t need to “sell” the angel investor in the introduction. Your opportunity should speak for itself.

We’ve spent a lot of time and effort putting together “How to Create the Perfect Email Pitch” which you can review here. This will include your elevator pitch but basically makes sure you cover all the high points in your email that will get an angel investor’s attention right out of the gates. It also kind of make sure you don’t come across like a cheeseball (hey, it happens to the best of us.)

Have your Pitch Profile Ready

These days just about everything is done through email, which means just about everything is also available on the Web.

Sending your elevator pitch along with a 20 megabyte PDF document is a sure fire way to never even make it past an investor’s spam filters. Instead, you should send a link to your Pitch Profile, which is an online profile that explains a little bit about your deal and provides a way for the investor request more information.

You can create a Pitch Profile for free on Invstor.com or Bizplan.com. It only takes a little while and it will be a much better way to provide a reference back to your company profile than messing with attachments.

Your First Response

When and if the angel investor responds to your email, you’ll either get a short “no” or a request for more information.

Most angels will request either an Executive Summary or a Pitch Deck which are pretty similar (we’ll explain in a minute). The angel investor isn’t interested in finding out as much information as possible about your deal at this point. In fact they are looking to find out as little information about your deal in order to determine whether or not they want to spend more time with you.

Don’t inundate the investor with every last piece of information you’ve ever collected for fear of them “not seeing everything”. They are likely reviewing a dozen other deals at the same time so they couldn’t review your tome of knowledge even if they wanted to (which again, they don’t). Simply let them know that more information is available upon request.

Executive Summary

The more traditional request from an investor is to ask for an Executive Summary. Over the past decade this has become less and less requested in favor of a Pitch Deck which is just a PowerPoint document of slides.

The Executive Summary is a 2 – 3 page synopsis of the business plan that covers things like the problem, solution, market size, competition, management team and financials. It is typically in narrative format and covers a paragraph or two about each section.

You can expect the angel investor is going to jump to the one section he’s most concerned about, read the couple paragraphs, and then maybe look a little deeper. He figures you’ll answer most of these questions in your pitch meeting, so he’s not going to spend too much time on your docs.

Pitch Deck

The other request you may more likely get is for a Pitch Deck. A Pitch Deck is essentially your business plan or executive summary spread across 10 – 20 slides in a PowerPoint document.

Investors like Pitch Decks because they force the entrepreneur to be brief, and hopefully use visuals instead of an endless list of bullet points. The Pitch Deck is your friend and most trusted ally in the angel investor pitch process. You’ll use it as your main collateral item to get meetings, it will be the focus point of your meetings, and it will be what investors peruse after your meetings.

The Pitch Meeting

Once the angel investor has reviewed your materials and determined they are interested in meeting you, you’ll obviously put together a time to go in for a pitch meeting.

Your pitch meeting is more about the investor liking you as a person than it is just pitching your idea. Take a little bit of time to try to establish some rapport. Investors will more often invest in an entrepreneur they like with an idea they have some reservations about than an idea they like an entrepreneur they think is a jerk.

During the pitch you’ll run through your pitch deck and answer questions. The goal isn’t to get to the end of the pitch deck in 60 minutes or less. The goal should be to find an aspect of the business that the investor actually cares about and zero in on that point. If the investor wants to spend 60 minutes talking about the first slide, don’t rush them. You don’t get points for presenting the 20^th slide. Focus on the conversation.

The Goal of the Pitch Process

The goal of your first few meetings isn’t to “close” the angel investor, it’s to establish a relationship that will naturally lead to a close. The investor isn’t someone looking to buy a car that you have to provide a great deal to. Be yourself. Represent the opportunity and your passion for business. That is all you need to convince someone to do a deal.

The beauty of pitching an angel investor versus a larger organization like a venture capital firm is that you’ve typically only got one person to convince. If you can build this one relationship, you’re on the right path.

How to Get Angel Funding

Fri, 14 Oct 2011 20:04:42 GMT

Getting angel funding is just like attracting the girl you want to marry. If you're fat, ugly, and out of shape you're going to have a hell of a time convincing a 10 that you're the one for her.

Angel Funding can be a great source of capital for promising startups. However, while there are a large number of active angel investors in the U.S., only so many checks get written and it's a competitive field. You'll want to make sure you give everything you've got when you have your shot at goal. In this brief article, we'll discuss how to get Angel Funding.

Use a Rifle, Not a Shot Gun

Thanks to effective Angel Investor Networks, getting in front of investors is no longer the main obstacle for startups like it was 10 years ago. Given this fact, many entrepreneurs take a shot gun approach and carpet bomb every Angel Investor they can find with their deal regardless of whether they are prepared and without regard to whether or not it is a good fit based on the investor's preferences.

This is a huge mistake. There are a limited number of Angel Investors so it's best to make the most out of the opportunities you do get and make sure it is done right. Do the proper research, find investors who are specifically looking for deals like yours, and only approach them. Not only will it drastically increase your odds of getting funding, it's just good tact.

Have Your Ducks in a Row

There is nothing worse than getting someone interested in your deal only to have them see that you are not well prepared. You will need an executive summary, a business plan, and a pitch deck ready before you start to pitch investors. If you don't yet have them, you're not ready to get Angel Funding.

The Angel Funding Dating Game

Again, getting angel funding is like dating. It's the easiest to get a date if you're really good looking or you're decent looking and have a number of people who vouch for you. If you can get an introduction to your angel investors from someone they trust, you'll have a much greater shot at getting funded than if you try to open a conversation with a cheesy one liner.

If you're startup is fat and ugly, you'll want to give it a makeover before you start searching for Angel Investors. In order to get Angel Funding, you'll need to have an attractive startup opportunity in an industry that matches the Angel Investor's interests.

Angel Funding Summary

1. You should never carpet bomb random angels with your deal. Hand pick the ones that have an interest in your industry and take the time to prepare well for your conversation with them.

2. Get your startup looking hot before you approach an angel. Have your executive summary, business plan, and pitch deck polished up and ready to go.

3. Get a personal introduction to the Angel Investor if you can. Having a killer opportunity and street credibility will give you the leg up you need to Get Angel Funding.

4. Don't waste your shots on goal. Take your time to prospect the right Angel Investors and be ready when your time comes.

Business Angels

Fri, 14 Oct 2011 19:35:00 GMT

Business Angels

You will quickly find that there are certain types of deals that buiness angels like to fund. It’s not to say there is a hard and fast rule that if you meet (or don’t meet) these criteria your investment fate is sealed, but it’s helpful to know the general parameters by which most angel investors make decisions.

They Like Local Deals

Business Angels tend to invest in their neighborhood first, all other things being equal. That’s not to say they won’t consider deals that are further away, it just means that like anyone else, they would prefer to get involved with business that they can connect with personally.

Early stage startup companies go through a tremendous amount of iteration and changes in their careers, so having someone that is standing next to you during these turbulent times is always a bonus. Angel investors know the perils of a startup because many of them have gone through it themselves.

They Like Industries They Understand

As successful business people themselves, angel investors tend to have deep domain expertise in particular markets. That doesn’t mean they don’t stray from their past and invest in companies that are outside their core domain expertise, but it usually helps if you can find something that they are familiar with.

In many cases finding an angel investor with significant industry experience can help you in more ways than just the capital they may invest. They may be able to help you make key business connections or provide insight into what they’ve learned from your industry. Beyond that, they will provide some powerful credibility to future investors when they see that someone from your industry has backed you.

They Want to be in your Deal Early

Long before you pitch to larger venture capital firms, angel investors like to be the early stage seed money that gets your company started. They are usually looking for deals where they can invest up to $500,000 although an individual angel investor will rarely put in that large of a chunk of money at once.

Regardless of the check size, they look to get an early stake in the company so that they can increase the value of their stock in successive funding rounds. Part of the allure of your deal is the fact that they are getting stock “cheap” by comparison to what it will cost when the company grows quickly from here. Later on as you start to grow and become sizeable, the appeal of an angel investor starts to wane and their opportunity to get into your deal goes with it.

They Need to Like You Personally

Angel investing is all about personal relationships. How an angel investor feels about you as a person and how well you get along is one of the single most important factors in making a decision. Of course angels want to invest in good companies and make good returns, but it’s highly unlikely that an angel will invest in an entrepreneur they don’t like personally just because the deal is so interesting.

That’s why it’s very important to develop a rapport with the angel early on, even before you are officially pitching them for money. You can’t fast forward this process, so the earlier you start the better off you are.

They Want to See Traction

Another incentive for establishing the relationship with your business angel investors will find attractive is watching you develop momentum. It’s easy for someone to say “I’ve got a great idea” but the entrepreneurs investors love to fund come back a week later and say “… and here’s what I’ve gotten accomplished since last week!”

Angel investors know the most valuable asset of an investment is the momentum. Some angel investors will write checks purely based on the current momentum of the company, realizing that there is a ton of work to do in the future to make it a viable investment.

The traction or momentum that you demonstrate to an angel investor can be in the form of finding some early customers, signing a key employee (who is probably working for equity) or getting some early press about you or your concept. All of these are firm indicators that your business is moving forward, and all of these will help you communicate your traction.

Angel Investor Groups

Fri, 14 Oct 2011 19:25:00 GMT

Angel Investor Groups

Angel Investor Groups are a collection of individual angel investors that come together to source and review investment opportunities. The angel investor group may invest as a whole or in some cases they may split the investment among a few select angel investors who particularly like one deal.

Benefits of Angel Investor Groups

The most obvious benefit for the entrepreneur to leverage an angel investor group is to broadcast their deal to a large number of qualified investors at once. Unlike a venture capital firm that will often invest in only particular industries, the angel investor group is made up of many varied interests.

Going through the submission process is a convenient way to identify particular angels who might be a fit for your deal, even if the group as a whole doesn’t feel comfortable making the investment. Think about the group in terms of lots of prospects instead of just one.

Submitting to Angel Investor Groups

Most well-organized angel investor groups have a formal submission process by which they accept new business plans and determine which ones they want to follow-up with. In most cases you can expect to get an answer back from the angel group, even if the answer is a “no”.

These submissions can typically be done online. Members of The Invstor.com Network or Bizplan can automatically have their plans submitted to angel investor groups through our system to save some time and headaches.

Focused by Region

Angel investor groups tend to focus most of their investing regionally, as the investors themselves band together based on their geography. This winds up being particular helpful for entrepreneurs because they can reach a large number of angels close by without having to track them all down individually.

On the other hand, it also presents a bit of a challenge for entrepreneurs who may not be local to the angel group they want to pitch. There is no hard and fast rule here for every group, but pitching your local group is going to be a far better opportunity than trying to pitch an angel group in another state.

Getting a Sponsor

The best way to submit your plan to an angel investor group is through a “sponsor” in the group. Like any other investment deal, angels rely on other angels to provide some proof that a deal is worth looking at. Instead of trying to convince the whole group that your deal has merit, consider trying to approach one member of the group and having them introduce your deal. You’re likely to get a much better response since the group will be using the trusted value of that angel to look further into your deal.

Side Car Deals

In some cases the angel investor group as a whole may invest a portion of your total funding amount, with the remainder individually invested by specific members of the angel investor group. This is referred to as a “side car” deal because it’s connected to the larger investment that the group intends to make.

Side car deals are different than just having a few angels who choose to invest outside of the fund. The side car deals usually draft off the terms of the original angel investment but include more stock allocated to particular individuals.

Due Diligence

If things go well with your pitch to the group you’ll begin the Due Diligence process. At this point the group will assign a certain number of members to form a sub-committee to review your deal more closely. Often this is done so that they can assign people with much greater subject matter expertise in your particular market or field.

Due diligence can vary in depth and duration, but realize that the investors are just trying to make sure that everything you are telling them checks out. They want to make sure they understand where your projections are coming from, whether your product really works, and a little bit more about the people you have behind your idea. It’s a big commitment they are making, so you shouldn’t be alarmed that they will want to kick the tires a bit before making an investment.

Number of Active Angel Investor Groups

According to the Angel Capital Association (ACA), there are between 10,000 and 15,000 angels believed to belong to angel investment groups in the U.S. Just under 7,000 of them belong to 165 member angel groups that make up the ACA. The ACA estimates that there are about 225,000 people who have made an angel investment of some sort in the past two years.

Angel Investor Group List

We’ve put together a list of popular angel investor groups that you may want to reach out to as you begin your quest for capital. This is just a small sample though. For the complete list of angel investor groups, use the “Investor Search” feature on The Invstor.com Network.

Medical Growth Fund - Cleveland, OH

North Coast Angel Fund - Cleveland, OH

Queen City Angels - Cincinnati, OH

Ohio TechAngels - Columbus, OH

Akron ARCH Angels- Akron, OH

Rocket Ventures - Toledo, OH

Core Network - Toledo, OH

Central Illinois Angels - Peoria, IL

Cornerstone Angels - Northbrook, IL

Hyde Park Angel Network - Chicago, IL

Stateline Angels - Rockford, IL

Wildcat Angels - Evanston, IL

Illinois Institute of Technology Angel Network - Chicago, IL

P3 Alliance (Purdue Angel Network) - Indianapolis, IN

Irish Angels - Notre Dame, IN

Stepstone Angels - Indianapolis, IN

Phenomenelle Angels - Madison, WI

Silicon Pastures - Milwaukee, WI

Wisconsin Investment Partners - Madison, WI

Marquette University Golden Angels Network - Milwaukee, WI

Blue Water Angels - Midland, MI

Grand Angels - Grand Rapids, MI

Michigan Angel Program - Detroit, MI - email

RAIN Source Capital - St. Paul, MN

Profile of an Angel Investor

Fri, 14 Oct 2011 19:21:00 GMT

Profile of an Angel Investor

Your typical angel investor is going to have been a successful businessperson or entrepreneur that is looking to put some of their earnings to work in an investment they really feel passionate about.

Make no mistake, the business of an angel investor is to make money. But there is a very personal attraction to each deal that makes working with an angel investor different than going to a nameless, faceless bank.

High Net Worth Individuals

The typical angel investor is someone who’s net worth is likely in excess of $1 million or who earns over $200,000 per year. Incidentally those look a lot like the credentials of an accredited investor. Realize though, that the angel investor is playing with their own money, not invested capital, so even though they may be a high net worth individual, they are still looking at money coming out of their personal bank account.

Makes a Few Investments

Most angels invest part time and therefore only have the resources to review a small number of deals.

Angel investors are limited by two factors – their time and their capital. Unlike professional investors like a venture capital firm, angel investors typically work with their own deal flow, which requires them to spend quite a bit of time sifting through new ideas to find something they want to dig into.

Aside from their time, angel investors have a relatively limited amount of funds to play with, so they have to be a lot more selective about who gets a check. A typical active angel investor may make just a couple investments per year.

Value Beyond Just Capital

Since angel investors were often successful in their own careers, having access to their experience and rolodex is sometimes even more valuable than the capital they invest.

The check is nice, but a strategic angel investor that can give you access to a customer that you would have never had a relationship with is even better (we all love revenue, after all). You may find that picking the right angel investors isn’t just about capital, but about access to resources you need to drive the business forward.

Gateway to Larger Capital Sources

Angels are one of the most trusted sources of new deal flow for larger capital sources such as lenders, private equity firms and venture capital firms – not to mention other angels. They may also help you syndicate your deal with other members of their angel investor group that they are a part of.

A venture capitalist, for example, relies on these angel investors to figure out whether the business has traction and momentum enough to warrant a larger investment. As such, you’re going to rely on these early angel investors to be your most valuable asset in follow-on funding as your grow.

Investing Gets Personal

Just about every other form of capital, like a bank loan or a venture capital investment, tends to focus on the deal and the capital. A deal with an angel investor, however, tends to be a lot more personal. There is often very little to go on in the idea stage, and the angel investor knows that. They are more likely to invest in you and your idea than the mechanics of the business itself. Later on when you start talking to larger professional capital sources, it’ll be a lot harder to get by just based on relationships and ideas.

A Few Angel Investor Profiles

If you’re trying to find angel investors for your own deal, you should start with our investor search to identify who might be the right fit for your business.

What are Angel Investors?

Fri, 14 Oct 2011 19:12:00 GMT

What are Angel Investors?

Angel Investors are typically high net worth individuals who invest very early into the formation of a new startup company. The role of angel investors serves as a critical bridge between the startup financing needs of a company and their larger capital needs later on.

First Money Into the Deal

After you get your initial friends and family funding, Angel Investors are the first checks written by “outside” investors in a company. They tend to be the first professional capital into a deal, but they are also looking to trade the risk of being in early with the reward of getting more equity (stock).

Later on as the company gets larger and their capital needs are greater, the amount of money an angel can invest doesn’t yield a very big percentage of the company, so effectively their money becomes less valuable. This is why angels are so consistently found early in a company’s formation.

Typical Deal Sizes

Angel Investors can invest as much as their wallets will support, but a their typical check sizes will be less than $500,000 in most deals, and can be as little as $5,000 depending on the opportunity.

As you start to cross the $500,000 mark, or even near that mark, you begin to get into a situation where angels will band together with other angels (sometimes in an Angel Investor Group) to help spread the risk across numerous investors.

They are “Investors”, not “Angels”

With a name like “angel’ there’s sometimes an expectation that these investors are looking to make charitable investments. That’s entirely not the case.

Angel investors are regular people just like you, albeit probably with more money. But they want to get a return on their investment like anyone else. If your company is losing tons of money or is in a terrible financial position, they don’t want to bail you out. They are not there to save you – they are there to make money.

These investors may look to take a chance on your idea, but they are only going to so if you are extremely well prepared. They don’t just hear an idea and decide to write a check. Anyone walking around with a check book in hand that has money to spend is getting pitched non-stop by people to write a check. Instead, they want people that represent a solid investment that they can feel confident will make a return.

Types of Deals Business Angels Invest In

Business angels tends to invest in companies that are in industries they know a lot about. If an angel investor made a lot of money in the real estate industry, you can imagine they would be most comfortable putting money back into that industry since they are going to be most confident in what to expect.

That’s not to say that it’s the only criteria for angel investors. They may have made their money in gold mining but are looking to make investments in Internet companies because they think that’s where the big upside opportunity is. While you wouldn’t want to count out an angel investor who didn’t come from your industry, you would definitely want to seek out those who might have a built-in affinity to your industry first.

How they Fit into the Investing Landscape

Angel investors (especially well known Angels), add a tremendous amount of credibility to a deal when you go to raise Venture Capital. When venture capitalists see that others have put money into your deal, it gives social proof to your team and venture. Additionally, most angels bring much more to the table than just money for a deal. They can bring contacts, management advice, and industry knowledge to a deal to help fast track your startup forward.

Angel Investor Statistics

Angel investors accounted for over $20.1 billion in investments into nearly 62,000 companies in 2010. This accounted for an average investment of about $325,000 into these companies. The Center for Venture Research estimates the number of active angel investors to be 258,000. This is a far larger number than those that belong to angel groups (only 35,000 belong to local angel groups).

Individual Angel Investors

Steve Baker - Accredited Angel Investor in San Francisco, CA

Dean Anthony - Accredited Angel Investor in Wellington, FL

Jason White - Accredited Angel Investor in Jackson Heights, NY

Bill Smarts - Accredited Angel Investor in New York, NY

John Nichols - Accredited Angel Investor in Orlando, FL

James Boyd - Accredited Angel Investor in Patchogue, NY

View More Accredited Angel Investors here.

Angel Investor Guide

Fri, 14 Oct 2011 18:42:00 GMT

Angel Investor Guide

Finding and pitching an angel investor goes hand in hand with being an entrepreneur. Angel investor capital accounts for the most common source of funding for startups who need someone to bet on the company in the early stages of its development.

This guide will walk you through what angel investors do, how to find them, and what the angel investor pitch process looks like in detail.

Angel Investor Basics

Here, we will walk through the Angel Investor basics from explaining what angel investors are to a simple explanation of how they work.

What are Angel Investors?

Angel Investors are a critical source of capital for young startups looking to raise their first round of cash. They tend to invest long before professional venture capital or private equity firms do, with check sizes between $5,000 and $500,000 on average.

Profile of an Angel Investor

The typical Angel Investor is a high net worth individual, often a successful entrepreneur in their own career, that is looking to make personal investments in a small number of deals. Their value to an entrepreneur can extend beyond the check, since a well-connected angel investor can open up doors to potential customers and larger investors as well.

Angel Investor Groups

Angel Investor Groups are made up of a number of accredited angels that band together to review new deals and make investments together. Entrepreneurs can benefit by broadcasting their deal to the angel investor group. The group may invest as a whole or individually based on how the individual angel investors feel about the opportunity.

Businesses Angel Investors Fund

The businesses angel investors fund tend to be local companies that may target industries where they have personally made money before, although that's not always a requirement. These investors want to get an early stake in your company, but they want to have an early relationship with you personally so they can see the company build traction before they write a check.

Find Angel Investors

How to Find Angel Investors

Looking for Angel Investors starts with three primary criteria; industry, location, and stage. Depending on what industry you are in, your location, and the stage where your company is at will determine the angel investors you will want to talk to. Here, we will discuss how to target particular angel investors by targeting your search, researching their portfolio investments, and finding out where they get their deals from.

Using an Angel Investor Network

Using an Angel Investor Network can be a very effective way to connect with angel investors. You will want to group the firms according to your needs and use the network to contact the angel investors. Using an angel investor network can give you and your opportunity added credibility.

Using an Angel Directory

An Angel Directory is simply a site or publication that provides a list of popular angel groups. Angel Directories can be useful as a starting point to help narrow your search and focus in on the angel investors you want to target for investment.

List of Angel Investors Groups

Angel Investor Groups exist all across the country. In fact, there are likely Angel Investor Groups in your city that you should evaluate for investment. Angel Investment Groups often favor local deals so targeting groups close to you will give you a leg up.

Angel Investor Process

How to Contact Angel Funding Sources

Contacting your target angel funding sources isn't that different than starting any relationship. It begins with looking for a common relationship that you can both relate to. You'll want to spend time crafting a well-written introduction and elevator pitch that gets your message across quickly and professionally.

How to Pitch Angel Investors Properly

Once you've gotten an angel investors' attention, you'll want to make sure you're ready to deliver a compelling pitch to angel investors that moves your deal forward. You'll need a strong elevator pitch, a pitch profile, executive summary and pitch deck at the very least in order to make your way through the process.

Angel Investment Deal Structures

The two most common types of deal structures for angel investment deals involve either a straight equity stake in your company or a convertible note. Either of these structures will be proposed in the coveted "Term Sheet" which is an angel investor's non-binding proposal that outlines the terms of their investment.

Common Angel Investment Terms

What's the difference between a "pre-money" and "post-money" valuation? What does "vesting" mean? What's a "cap table"? It's easy to get confused by all the angel investment community uses, so we'll give you some quick explanations of what it all means and what you need to know.

Common Venture Investment Terms

Fri, 14 Oct 2011 00:51:00 GMT

Common Venture Investment Terms

Digging into the world of venture investment can be mind-numbingly painful with all of the lingo and jargon that surrounds these deals.

There are two categories of terms to worry about - those that you'll understand easily by reading below and those that you'll probably need an attorney to explain. Needless to say, we are going to cover the former here.

Most investors are going to expect you to be fluent in at least the common venture investment terms below.

Valuation

When you hear about companies raising money on a "big valuation" they are referring to the projected value of the company that was agreed upon when the investment was made. Note we're saying "projected value" because most valuation amounts are highly speculative (read: “made up”) in the venture investment world.

You'll commonly hear two methods for expressing the valuation of a company:

Pre-Money Valuation - The amount the company is valued at before money is invested. If you valued your company at $5 million, the Pre-Money Valuation would be $5 million, as in "before money was invested."

Post-Money Valuation - The amount the company is valued at after the money is invested. If your company was valued at $5 million before the investment, and the venture investment was $1 million thereafter, the Post-Money Valuation would be $6 million.

Dilution

Cap Table

Common and Preferred Stock

Vesting

Stock Option Pool

The Least You Need to Know

Chances are you’re only going to get presented with the terms we’ve described in early meetings. Most of the complicated stuff won’t appear until you’ve been presented with a term sheet that involves more complex terminology. Don’t worry – that’s what a good attorney can help you sort through. For the time being just be ready with a few key terms and you’ll be just fine.

How to Raise Venture Capital

Fri, 14 Oct 2011 00:41:00 GMT

How to Raise Venture Capital

When you start to raise venture capital for your company you’ll quickly find there’s a common process each venture firm utilizes.

You have to appreciate the fact that these firms are constantly pitched by every entrepreneur with an idea, so their first order of business is to separate the serious entrepreneurs who want to raise venture capital from the crazy ideas they want to run away from!

Every entrepreneur looking to raise venture capital goes through roughly the same process. They start with an introduction to the firm, get invited to pitch, make their way through a few successive meetings, and eventually wind up pitching the full partnership for a final decision. From there they hopefully receive a term sheet and begin due diligence to get to a close.

Venture Capital Associate Gauntlet

As you’re making your initial contacts to find venture capital firms, you’ll probably be guided toward the inbox of the venture capital Associate. The venture capital Associate is the front line executive of the firm, typically the most junior member of the team. Their job is to weed out who should talk to the Partners and who should get a warm goodbye.

Associates can be valuable allies in getting prepared to talk to the Partners and understand the firm, but be very clear about one thing - they cannot make investments. They can tell you how much they love your deal, how smart you are, and how great the deal would be for the firm, but until you're meeting with at least one Partner, you're still only on first base.

You Need a Meeting with a Venture Capital Partner

Your goal, therefore, is to target a meeting with a venture capital Partner.

The Associates' goal is to screen you, prep you, and if they feel strongly, recommend you to a Partner at the firm for further review. The Associate is graded by his superiors by how well she does this, so she is very inclined to make sure you look good so she looks good.

You’ll be graded on how well you get past the Associate.

Meeting the Venture Capital Partner

Whether you go through an Associate or get straight through to a Partner, the relationship starts and ends with the Partner. The Partner is most likely going to be your ally for life. He's likely going to be the one who joins your board, and he's likely going to be the one you spend all of your time with. You'll meet the other partners if they like your deal, but you're only going to substantially deal with one guy.

When the venture capital Partner is meeting with you he is thinking one thing "Is this deal worthy of presenting to my other partners?". Venture capital firms tend to consist of a group of partners who rely on the individual partners to vet deals and present their best options. If you can't convince the Partner to endorse you for a meeting with his fellow partners, you're not going to move forward.

The Big Show: The Partner Presentation

The final act in this story is the "partner presentation" where you will present your pitch to the full partnership. Most venture funds vote unanimously for new deals to be approved, so even one Partner that isn't behind you is a problem.

If you haven't gotten to the partner presentation you're not likely to get past the goal line. Even if you're hearing all great things from everyone you've met, until you have that meeting you don't really have a forum where the investors can make a real decision.

The Coveted Term Sheet

Once the partners have agreed to make an investment in you, their offer will come in the form of a Term Sheet. A Term Sheet is an overview of all the key terms of the deal, which will later be taken into a more formal legal agreement between the two companies.

The Term Sheet's purpose is two-fold. It's a Letter of Intent that shows the entrepreneur that the firm is serious about the deal and it's an Offer Letter on what terms the venture capital firm is willing to invest. The latter is what gets far more interesting since it sets the valuation of the company, the amount invested, and any important rights or provisions the investor wants as part of the deal. If some of the terms confuse you, we would recommend taking a look at our article on Common Venture Investment Terms.

Venture Capital Due Diligence

The due diligence process may occur at almost any point in the process of pitching venture capital firms based on how comfortable they are in understanding your deal. Some may begin digging into the details of your company even before you get to pitch a Partner, so that they are sure they want to get more engaged on your deal.

Otherwise it will tend to occur after a Term Sheet is issued. A venture capitalist doesn't want to spend countless hours digging into your back story if you can't even agree on what terms they might invest. The most valuable asset of a venture capital firm is time, so spinning cycles on a dead deal is a huge problem.

The due diligence process will vary per firm and deal. If the company is still in the early prototype stage there may not be much to dig into, but if the company is already up and running and generating revenues, the venture firm will certainly want to look at financials, talk to customers, and make sure you're a solid investment.

The Close

The final step of pitching a venture capital firm is the "the close". This means both parties have agreed to the terms within the Term Sheet and are ready to begin the legal process of updating their respective legal agreements and ultimately transferring the funds to your bank account.

The close is not quick. Entrepreneurs sometimes think that since a "deal is done" and the terms have been agreed upon, that the money will show up any day now. That simply isn't true. The deal is then handed to the attorneys from both parties who will begin getting into the nitty gritty of the legal agreement where certain problems can then pop up later.

Even a fast close can take 30 days. A more typical close is longer than 45 days. 90 days would mean there were probably some points of contention between the entrepreneur and the investor. Longer than 120 days means the deal can potentially be at risk. Faster is better in this case.

Pitching Venture Capital Firms

Fri, 14 Oct 2011 00:20:00 GMT

Pitching Venture Capital Firms

A fair warning about pitching venture capital firms: No amount of preparation will guarantee that you will raise venture capital. But being un-prepared is the fastest way to fail. You really only get one shot making the right impression with each venture capital firm and the last thing you want is to blow your chances because you didn't spend the time to know your business inside and out.

In the previous section we explained how to find venture capital firms to send your elevator pitch to. Now we’ll explain what you’ll need when they ask you to present.

Executive Summary

Over the years the reliance on venture capital firms to review the traditional executive summary has changed. The traditional executive summary was a 2 – 3 page document that covered the highlights of the 50-page business plan. In the days of PowerPoint and Web profiles, more of this information has moved to short form “just show me, don’t make me read 3 pages” type formats.

Still, it doesn’t hurt to have a well-written 2 – 3 page synopsis of your business handy in case someone asks for it. Not every venture capital firm has embraced the newer techniques and ultimately it’s just a narrative version of your pitch deck and pitch profile anyhow.

Pitch Profile

Most of your introductions to venture capital firms are going to come through email, which means most of the information you’ll want to share is either going to be an attachment or a link. Since attachments can easily get eaten up in spam filters, your best bet is to include a link to your public pitch profile. You can create a pitch profile on Invstor.com or Bizplan which will detail who you are, what your company does, and how to contact you.

The pitch profile doesn’t have to include any public information you don’t want it to, but it should certainly exist in case the venture capital firm wants to view your information immediately.

Pitch Deck

The most useful piece of pitch collateral you’ll have for raising money from venture capital firms is going to be your pitch deck. Your pitch deck is a 10 – 20 slide presentation that covers the basic elements of your business plan, from the initial problem that you are solving to the plan you have for how to exit the business and make a ton of money.

Pitch decks are great because they force the entrepreneur to be brief, work great for presenting information visually, and are most useful in a meeting when most pitches really happen.

As a side note, pitch decks are becoming the de facto response to “send me some more information” among venture capital firms. If you don’t have your pitch deck ready, you’re not ready to be reaching out to venture capital firms.

Business Plan

Contrary to what you may think, venture capital firms don’t actually read business plans, but they are sure glad you have one. Business plans aren’t really about the document itself, they are about the planning that goes into composing the document.

It’s highly unlikely that you’re going to get asked to submit a full business plan to a venture capital firm, but you’re likely going to get asked all of the hard questions that could be answered in the business plan, so putting one together is a great exercise in preparation.

Financials

Of all the documents that you’re going to be expected to be armed with, the financials are the most important.

Most venture capital firms are going to expect a reasonable four year projection of the income and expenses of the business. They’ll want to know how quickly you will be able to get the business to break even. They’ll want to know what you intend to use their money for. And of course, they’ll want to know how you intend to give it back to them with a healthy return.

Be prepared to provide an Income Statement, Use of Proceeds, and Breakeven Analysis at the very least.

Due Diligence

The last item is kind of a catch-all that we’ll call “Due Diligence”. When the venture capital firm gets more interested in your deal, the next phase of discovery is called due diligence. During this phase they will dig into all the details of your business, from your financials to the details of how your business model works.

This is where all of the research and support you’ve put together will be put to the test. You’re likely going to get asked to prove how you arrived at the market size you’re going after. You may get asked to have your early customers talk to the venture capital firm. Assume the firm is going to do its best to make sure everything you said was true actually checks out.

Be Prepared

The time to get all of these materials together is before you decide to start reaching out to venture capital firms.

They are going to assume you are ready to go and are well-prepared. Stalling for weeks to quickly put your materials together after you’ve been requested to pitch is not going to end well, so like the Boy Scouts – be prepared!

How to Find Venture Capital

Fri, 14 Oct 2011 00:07:00 GMT

How to Find Venture Capital

The first step to find venture capital is to make a smart introduction to the venture capital firm you’re interested in meeting.

You’re not trying to contact as many people as possible; you’re trying to find venture capital firms that are the best possible fit for your deal. The more closely aligned you are with the needs of the venture firm, the more likely you’ll find venture capital firms willing to write you a check!

Getting Introduced to VC Firms

Every pitch to a venture capital firm starts with an introduction to someone at the firm. It helps to know the exact profile of a venture capitalist to know which level of introduction makes sense. Typically you'll start with an introduction to an Associate and then work your way up to the full partnership.

Write a Great Elevator Pitch

Most introductions these days come through email, so having the perfect email pitch is critical.

Take your time and do this right, because you won't get a second shot at getting in the door. Entrepreneurs spend an inordinate amount of time crafting the right email intro, which includes a highly focused elevator pitch. This typically isn't done quickly and it's worth every moment you spend on it.

We’ve written a comprehensive yet simple way to write the perfect email pitch every time. Take a look at that if you need some pointers.

Start with Trusted Connections

Venture Capitalists rely heavily on trusted connections to vet deals. These come from past entrepreneurs they’ve worked with, advisors at startup companies, and even other investors. The value of getting an introduction through one of their existing trusted connections is exponentially higher than going in cold.

That said, chances are you don’t know any venture capital firms personally. Most people don’t, so that’s no big surprise.

However you may find that you do in fact know people who could make the introduction for you. Try searching all of your social networks (both the online and the offline ones) to find out who you may know within each firm. You would be surprised at how many people may only be a contact or two away from making an introduction. One introduction can mean the difference between raising or not raising venture capital.

Warm Up a Cold Introduction

Assuming you can’t find any trusted connections to the venture capital firms you’d like to pitch, your next best alternative is to make the warmest possible introduction.

You’re looking for any connection you can make to the venture capitalist so that you can demonstrate you’ve done your homework and you’re not just sending out form letters. Look for any background you can find on what previous deals they may have done that relate to your pitch. Look for some recent press that they may have gotten that you can refer to. You just need to create a little bit of warmth and personality to what’s otherwise a cold intro.

Showing that you’ve already done some of the homework will go a long way toward making sure you don’t wind up in the “deleted” folder.

No Sales Pitches

Do everything you can to avoid coming across like a salesperson. You don’t need to “sell” the investor on wanting to make an investment. Phrases like “greatest investment opportunity” should be saved for scam artists. Instead you’ll want to focus on explaining what your company does in as few sentences as possible. A good, short elevator pitch is far more impactful than a wordy and cheesy sales pitch.

No Carpet Bombing

Your first impulse may be to carpet bomb your entire target list to try to get as many responses as quickly as possible. Please don’t do this – it’s a horrible idea. Let us explain.

The most important part of reaching out to your contacts is the content of the response you get.

Contact each firm individually, with no more than three at once, and wait for real responses so that you can modify your pitch to future firms. The worst thing you can do is to burn up your entire list at once with the wrong introduction email only to find out you've exhausted all your best candidates with the wrong intro.

What to Expect Next

Depending on the quality of your elevator pitch and the quality of your introduction, you can reasonably expect to find venture capital firms will give you a quick “no” if they are not interested and a quick “yes” if they are interested in learning more.

VC firms don’t have a ton of time to waste on stringing you along, so if they are interested at all, they will most certainly invite you in to pitch.

Once you do get that invite, you’ll want to be fully prepared to respond. For that you’ll need your pitch materials, which we explain fully in the next section “Pitching Venture Capital Firms”.

Searching a Venture Capital Network

Thu, 13 Oct 2011 23:54:00 GMT

Searching a Venture Capital Network

There are literally thousands of investors in our venture capital network, but if you're looking purely for venture capital firms (not angel investors or private equity) you're going to be digging through less than a thousand. According to the National Venture Capital Association the, the active venture capital network in existence today is less than 500 firms, though you will probably still find interest in some outside that number.

With such a specific number of active firms available, the key is to figure out how to pare them down and rank them in order of which to approach first. Let's first take a look at how to filter and find them, and then determine in which order to rank and contact them.

Venture Capital Network Search Tips

There are three primary criteria to consider when starting your search - Industry, Location, and Funding Size. Once you’ve filtered through these criteria we would suggest you start looking into the portfolio investments of each firm.

Industry (Markets)

The single most important filter amongst venture capital groups is the industry or markets they pursue.

Venture Capital firms focus on particular markets that they have deep domain expertise in and where they think there will be the greatest upside potential. If nothing else, it's critical to at least know what markets a venture capital group invests in and how closely aligned they are with the industry and market you're in.

In some cases the venture capital group will be split up amongst its partners across different focus areas. Your best bet would be to pursue the partner who most likely has an affinity for your market, as they will be your most valuable champion through the venture capital pitch process.

There are times when a venture capital group will make investments outside of its core focus, but it's rare and it's usually based on an outside condition, such as investing in an entrepreneur that the firm has previously invested in on another startup.

Location

Venture Capital firms, like any investors, like to be as close to their investments as possible, and that often means being physically present. We may be in the age of virtual presence and video conferencing, but nothing beats sitting right across from a real person and figuring out tough problems.

Therefore, you can expect to see a strong preference by venture capital groups to invest in their local areas. Anywhere an investor can reasonably get there and back within the same day is usually a safe bet. Not surprisingly, venture capitalists want to be home for dinner like everyone else.

It's certainly not unheard of for venture capital groups to invest outside of their neighborhood; it just presents more of a challenge than a local investment. As the entrepreneur pitching for capital, your chances are almost always better with investors that are close to home.

Funding Stage and Size

Not every venture capital firm invests at the same "stage" of a company's investment lifecycle. Some venture capital groups invest very early in a company's development, and may go in as early as the actual inception, although this is rare. That’s usually the domain of Angel Investors.

Venture Capital groups define their stage of investment differently, but you can think of them in roughly three categories:

Early Stage - The company probably has not raised money previously or has had a few angel investments but is still early in its formation. These rounds tend to be less than $2 million and are used for just getting the company off the ground.

Traditional VC - This is the most common type of venture capital stage, where the first round of investment ranging from $2 million to $10 million is invested in a company. The company is probably already capitalized by angel investors who put in the first $1 million or less.

Late Stage - The company has taken on at least one round of venture investment (or a similar structure) and is now going on to much later and larger rounds, probably in excess of $10 million or more.

You'll want to understand what stage each venture capital group puts their money into a company so you're not talking to a Late Stage investor about an Early Stage opportunity. These funds are typically geared toward a particular stage of investment because that's where they believe the opportunities lie.

A side note here – the “stage” tends to be more of a preference than an absolute barrier. You should know what stage they prefer to invest, but you shouldn’t discount a firm solely based on being in the wrong stage.

Portfolio (Extra Credit)

Within the venture capital group's industry focus lays their existing portfolio of investments. Nothing is a better indication of what types of investments they make than looking at the places where they've actually written checks.

After you've found a venture capital group that seems to invest in your industry, digging into their portfolio companies will help you understand what types of companies within the industry they have an affinity for. You'll also be able to find out which partners have made those particular investments so you can target those individuals for your own introductions.

Ranking Your Venture Capital Network Search Results

Once you've filtered your list by Industry, Funding Size, and Location, your next objective is to rank them in order of which you want to contact first.

This is where our friend the Internet comes in handy, and more specifically, popular social networks. What you'll first want to find is which firms you may have some sort of warm introduction to. Search the names of the partners or the firms in all of your most connected social networks like Facebook and Linkedin. Your best introductions are going to come from firms where there is some pre-existing relationship.

If that doesn't yield any results, your next best bet is to start with firms that may be within driving distance to you. It's easier to get a meeting with someone locally than it is far away, all things being equal. Local firms often are more receptive to local companies because they feel comfortable with a local connection.

Profile of a Venture Capitalist

Thu, 13 Oct 2011 23:40:00 GMT

Profile of a Venture Capitalist

Contrary to popular mythology, venture capitalists are just regular guys who make bets on big opportunities like anyone would in the stock market. They do everything in their power to make sure their bets pay off, but ultimately, even the best ones miss far more often than they hit.

A venture capitalist is charged with finding a relatively small number of investments (usually less than a dozen per year) to make over a 7 - 10 year period. While the venture capital firm may look at thousands of deals in a given year, they can only pick a handful of deals to pursue.

Writing Checks is Easy. Managing Companies is Hard.

The reason venture firms can only make a small number of investments is because each investment must be personally managed by one of the Partners of the firm. Since partnerships tend to be small - less than a dozen partners - the number of venture capital portfolio companies that they can reasonably manage is also pretty small.

Therefore you're really competing for the venture capitalists' time, not just their money. They can easily write more checks, but they can't allocate any more time. They need to be sure that your investment is worth segmenting their time even further, reducing the amount they can spend on existing investments as well as new potential investments.

Know Their Focus

Investment deals are complicated, and unlike public company stocks where you can judge a potential investment based on numeric values, an investment in a startup company can only be gauged based on how well you understand the sector that company is in.

Be certain that whomever you are meeting with understands your industry. Don't assume for a moment that because they "know about business" that they are the oracle of every industry. Venture capital Partners to be highly focused on particular market segments where they have a great deal of domain expertise.

Your best bet when selecting venture capital firms to pitch is not only to find out where the firm tends to invest (you can find that in their portfolios) but also where the particular Partners within the firm invest. You'll get far more traction with a Partner who knows and likes your industry than one who will spend more time trying to figure out what you do rather than why you're special.

Associate or Partner? It Matters

Amongst venture capitalists, titles matter. It's not due to ego (although it does come into play) it's due to decision making authority which matters to you as the entrepreneur.

While there are a handful of titles that are thrown around, such as General Partner and Principal, the one that matters the most is whether the person you're talking to is a "Partner" or not.

Venture Capital firms are setup as partnerships, with each partner typically getting a vote in whether a new investment is made. Structures differ a bit from venture firm to firm, but many require a unanimous vote in order to make an investment decision.

For this reason, unless you're getting buy-in at the Partner level, you're not over the goal line.

The Role of the Venture Capitalist Associate

Associates are the entry level candidates at a venture capital firm. Since there are very few firms, these jobs tend to be highly coveted, so even an entry level Associate will tend to be pretty polished.

Entrepreneurs often get excited when a venture capital firm makes and unsolicited call asking about their business. They immediately assume that the firm is interested in making an investment. The truth is they may be, but more likely it's an Associate looking to drum up new business.

Generally speaking, if you're getting an unsolicited call from a venture capitalist, it's from an Associate of the firm. The first question you should politely ask is "What is your role at the firm?". If they don't use the word "partner", it's most likely because they aren't one. Partners at VC firms usually make it very clear they are partners. Everyone else dodges the question.

The Golden Key: A Partner

Within the land of venture capital giants, the Partner reigns supreme.

The Partner has the ability to endorse your deal to his partnership, which is exactly the goal of all of your pitch meetings. The Partner is the person who will most likely join your board. When things go really well or really horribly, this is specifically the person that you're going to be married to through the entire ride.

Finding the right fit is more than just "anyone that will write a check" because in fact any venture capital firm can write a check. The right fit is a specific partner that truly understands and believes in your business and will go to bat for you when you really need it.

And trust us, at some point you'll really need it.

Looking for a Venture Capitalist?

What a Venture Capital Group Invests In

Thu, 13 Oct 2011 23:14:16 GMT

If you understand how venture capital firms work, it'll be pretty easy to know what a venture capital group invests in.

Venture capital groups are not just broad market investors that put their money wherever there is a potential cash upside. They specifically look for high risk, high growth industries and opportunities where there is a lot of M&A and IPO activity. They need their investments to become liquid in a short period of time, so companies that are just profitable aren't good enough. They need to be purchased or taken public for them to matter to a venture capital group.

Companies, Not Just Ideas

Every company starts with an idea, but when it comes to writing checks, venture capital groups tend to look for ideas that have already turned into operating companies. The early stages of ideas that are just on the back of a napkin tend to be the domain of Angel Investors. Once the company has gotten some traction and begun to grow, then it becomes the domain of a venture capital group.

Big Markets

Unlike an angel investor, a venture capital group can only invest in deals that have a huge potential upside that will likely lead to an acquisition or IPO.

In order to do this, venture capital groups must target companies going after extremely big markets that have plenty of room for these types of outcomes.

What's considered a "big market" by venture capital standards? The most consistent answer would be a market that's big enough to support a company to go public. Short of being acquired, a company going public is the only outcome that will provide the liquidity that a venture capital needs to get its return on investment.

Specific Industries

Not every industry can generate the types of returns venture capital companies need. You may be running the most impressive landscaping business in your city, but unless that industry is churning out public companies, you’re probably not a likely fit for a venture capital group’s money.

We’ve mentioned the most popular venture industries like technology and healthcare, but those aren’t the only industries venture capitalists will look at. They are most concerned with rapid growth and big sales, which sometimes come from other industries like retail. Starbucks may have only been a coffee shop at first, but they showed that there was a growth path that could give them a public market-type opportunity.

Venture capital groups tend to concentrate on specific markets where the partners have significant domain expertise. That’s your opportunity to connect at a very personal level with the firm and get them excited about your deal.

Momentum and Traction

Assuming your company fits into the spectrum of investments the venture capital group makes (big markets, hot industries) the next thing an investor will look for is momentum and traction.

It's all well and good to have a novel new idea, but it's something else entirely to show that the company itself is taking off. Twitter is a clever idea, but Twitter quickly getting to 100,000 users practically overnight is something that will make every venture capital group lean in and take notice of.

Even bad ideas (let’s not mention any names) can attract the attention of venture capital groups if there is enough early momentum with the company to warrant investment. No one really knows for sure which companies are going to become the next big hit, so investing on momentum is at least an early indicator that a company might have struck gold.

Track Record

A popular phrase among venture capitalists is "I don't bet on the horse, I bet on the jockey." Don't worry, in this case they aren't calling you the horse!

The entrepreneur's track record is incredibly important in evaluating a venture capital group's decision to invest. Demonstrating your past achievements is a fantastic way to give a venture firm confidence that you'll be successful in the future. In many ways it mirrors the way employers look at your resume in order to see if you are qualified for a job.

That's why you'll often see companies that the venture capital group would never normally invest in get a check - they believe so strongly in the entrepreneur.

And that’s the key – the venture capital group strongly believing in you. If they like you and the idea is so-so, there may be a deal. But if they like the idea and think you’re not someone they would want to back personally, the deal is almost certainly dead.

How Venture Capital Firms Work

Thu, 13 Oct 2011 22:06:00 GMT

How Venture Capital Firms Work

It's helpful when pitching venture capital firms to understand the mechanics of how the venture fund itself works. This will often give you an inside glimpse as to the motivations of the partners as well as how to understand the goals of venture capital firms overall.

How a Venture Capital Firm is Created

A group of smart people get together and decide that they would like to raise a venture fund to make investments in promising companies. In order to attract investment capital, they reach out to and pitch Limited Partners (LPs) who commit large sums of capital to the fund. They believe that the newly minted venture capital firm will make smart bets on promising young companies which will create a huge return on their investment.

A Limited Window to Invest

The venture capital firm typically has between 7 - 10 years in which to invest their LP's money into a startup, grow that startup, and sell the startup to another company or take it public (the exit). In the grand scheme of growing companies, that isn't a lot of time.

Therefore the newly created fund needs to find opportunities relatively quickly toward the inception of the fund, put that capital to work, and then spend the rest of their time trying to make sure those investments become big exits.

Balancing Equity

The only type of deal that works for these venture funds is to take an equity stake in the startup's company, which hopefully they can sell later when it becomes wildly successful. Venture Capitalists get paid on a percentage of the profits they generate for their LP's, so if there isn't a big sale, they only get a pre-determined salary, which usually isn’t terribly small either.

The entrepreneur and the Venture Capitalist are in a constant struggle between giving up enough equity to make the entrepreneur still feel happy and taking enough equity to earn the venture capital fund enough profit to return to its Limited Partners.

Go BIG or Go Home

With such a short window of opportunity to make a financial return, venture capital firms need to invest in particular markets where there is the greatest opportunity for a massive exit. Therefore, industries like technology and healthcare, which can take a small idea and turn it into a huge opportunity quickly, tend to be their focus. Other industries such as retail, consulting, and real estate, tend to be less attractive because they cannot produce exponential returns quickly.

Remember that a venture fund needs to make huge bets in order to get huge returns. Therefore they must start by finding companies that have huge exit potential and then reserve enough cash and manpower to support them through their growth.

Lots of Failure

The cold hard reality is that most of these investments, even after a tremendous amount of screening and support, are simply going to fail. When an investment fails, the money that was invested tends to go with it, meaning the venture fund has to absorb massive losses in its tenure. To account for this massive failure, the venture capitalist must hope that at least one of their investments will be such a big hit that it will make up for all of the failures.

What this Means for You

The very nature of a venture capital fund explains exactly what the entrepreneur should expect when pitching their business.

First, that the venture capital investor is certainly going to look for deals that fit within high growth, high exit industries like technology and healthcare.

Second, the venture capitalist is going to want a healthy equity stake in the business in order to provide enough proceeds in an exit to make up for all of their losses. “Healthy” is a relative term, but it’s usually more than 10% and less than 50%.

The third is that the venture fund is going to need to invest in a business that has the opportunity to generate a massive return in a short period of time. A business that just throws off a healthy profit each year does nothing for them in the time frame they have allotted.

The last, and this may be the most important, is that the venture capital fund can only have one outcome with your company after they have made their investment - either sell it or take it public. Either way once that money goes in the company, it is on a single path toward liquidity.

What is Venture Capital?

Thu, 13 Oct 2011 21:52:00 GMT

Venture Capital Funding

Venture Capital funding is both the most commonly referenced and yet commonly misunderstood form of investor capital available.

Simply put, venture capital funding involves a venture capital firm investing a large sum of money (typically starting at $2 million or more) in exchange for an equity stake in your company.

Venture Capital Funding Risks and Rewards

Unlike banks or more traditional investment sources, venture capital funding is all about big risks and big rewards.

Venture capital firms specifically look for companies that offer an exceptionally large growth opportunity, which you can think of as the type of company that could go from inception to IPO in less than 10 years.

With big rewards, however, come big risks. These opportunities usually exist within the technology and healthcare sectors which are fiercely competitive and often highly speculative. Venture capital may be responsible for big hits like Google, Apple, and Facebook, but there are also hundreds of failed investments for every one of those hits.

Trading Equity for Capital

If you go to your local bank and apply for a loan, you're going to be asked to pay the principal back with interest. You're not going to be giving part of your company to a bank and you're not going to ever be asked for anything more than the principal and interest.

However if you go the route of venture capital funding, you're going to be trading your equity (a stake in your company) for capital and you're going to be asked to return a massive amount of money back (hopefully much more than 3 times the invested amount) in less than 10 years.

Entrepreneurs are typically less concerned about the payback amount or the time period than they are the equity and control they often give up to take on the capital. One lesson that gets learned quickly after taking venture capital funding - you'd don't get that equity back - ever.

Venture Capital Funding is In Short Supply

Although venture capital funding gets a lot of credit for financing the big publicly held companies that you read about in the papers, there are surprisingly few of them in existence and they fund a lot fewer companies than you would expect.

On average venture capital firms have accounted for about 4,000 deals per year (and declining substantially on average) and number just under 500 active firms in the United States alone. Quick math would tell you that the average venture capital firm funds less than 10 deals per year which is highly selective.

It’s Really Competitive

The scarcity of venture capital funding means there are far more deals than there are available checks. A well-known venture capital firm can look at over 1,000 pitches in a given month and make an investment in one, if that.

With that in mind, consider how this impacts your own pitch. You’re not just competing with good ideas – you’re competing with really good ideas from incredibly well-prepared entrepreneurs. To be one of the chosen few who stand out among all of those hopefuls you’ve got to put everything you have into making your deal shine. Next, read How Venture Capital Firms Work