Raising Angel Capital

Notes from Stephen Poland’s Book

My V1.0, 08/16/2020

Poland, S.R. 2017. Raising Angel Capital, 1x1 Media, LLC. A "recommended" book for this course ($6.99 on Amazon.com).

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Time (After personal and F&F investments)

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Understanding angel investors

Angels are high net-worth individuals who invest in startups and early-stage ventures, either independently or in organized angel investor groups

How they made their money is important.

• An angel’s background (education, experience) and the source of her or his wealth signals which types of startups s|he will understand and how likely they are to engage with founders
• Ideal angels for your startup come from and/or understand your kind of startup
• Make sure you research how prospective angels got where they are

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Poland, 2017

Examples of paths to becoming an angel investor

• Successful entrepreneur
• Corporate executives
• “Doctors, lawyers, and dentists…”
• Wealthy family members

Each of these is a unique archetype; there could not be a greater gap between entrepreneurs and dentists…you need to “know how they got their money”

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Poland, 2017

Why angels invest - founders need these insights

High financial returns: 5-10x money put in is considered a “win”

Economic development: helping young companies grow in their backyard, creating a supportive environment for startups and entrepreneurs (re: ecosystem)

Giving back: they’ve been successful and want to help others

Changing the world: impact investors who want to help disadvantaged populations or segment of our economy

Excitement: You get to learn new technology and trends

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Poland, 2017

Angels: Individual versus Organized Groups

Individuals

Can usually make deals quickly, compared to organized groups

Like to be “first money in” for startups to validate them for later investors

Often motivated to invest as a show of support for the entrepreneur as much as an investment in the idea, tech, or company

Can serve as experienced mentors to guide inexperienced founders through the process

Groups

Members can share the workload of screening and vetting startups

Bring different levels of investing experience and perspective

Establish processes for evaluating startups, understand they are building an investment portfolio; meet on a regular schedule; usually have “ready” legal documents

Each member = ~ $25,000 buy-in; # members X buy-in $ = investing capacity

Less likely to expect day-to-day involvement in your startup’s daily business operations

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Poland, 2017

Why work with Organized Angel Groups? (or not)

Benefits

• Higher investment amounts
• Accredited
• Sophisticated
• Legally clean
• Risk tolerant

Disadvantages

• “10 angels, 10 opinions”
• Slow process
• Limited availability
• Expect you to understand “the game”
• Reputation to protect = high bar of selectivity

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Poland, 2017

“Angels invest their own money, and venture capitalists invest other people’s money.”

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Vetting prospective angel investors

Top attributes

• Product and industry knowledge
• Customer insider
• Technical expertise
• Startup knowledge

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And make sure you do due diligence on them, focusing on:

• Their investing experience
• Startup references
• Previous wins
• Match of values with yours

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Poland, 2017

What do angels look for in the “ideal” startup investment?

• Great teams
• Large target market
• Customer traction and retention
• Defensible intellectual property and/or market position
• High growth potential (three to five years)
• Scalable model

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Poland, 2017

The angel funding process

1. Introduction to angels
2. The pitch
3. Due diligence
4. Investment
5. Keeping investors updated

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Poland, 2017

The angel funding process: 1. Introduction to angels

• Get a warm introduction
• Get them to review your plan or pitch deck
• Get an invitation to pitch

Goals: You want an invitation to the in-person pitch, meet the angels, let your passion and personality shine

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Poland, 2017

The angel funding process: 2. The Pitch

• Set a meeting date and prep your champion
• Get to know the angels
• Make your pitch (< 15 minutes), Q&A
• The vote (?); ask if there is enough interest for him/her/them to make an investment

Goals: Get the angel group to move to due diligence; build credibility and trust; share your passion and energy; do NOT ask them to sign your Non-Disclosure Agreement (NDA)

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Poland, 2017

The angel funding process: 3. Due Diligence

Angels will test and validate your key assumptions; make sure you already have; they will/might check your

• Market assessment: go-to-market strategy, segments, channels, sales process and pipeline, early customer interviews, sales cycle, lost customers - why?, competition
• Technology assessment: status of dev, testing and feedback, licensing, status of IP protection
• Management team assessment: resumes, personalities, social media profiles, business reference checks, coachability, gaps or critical needs in the team
• Operations assessment: R&D staffing, customer engagement, sales process & expertise, marketing, accounting, and information systems
• Legal review: corporate legal entity - LLC, C corporation; bylaws and charter, lawsuits, IP details
• Financial review: previous investments and terms, funding plan with key milestones, current valuation and justification, likely follow-on rounds; realistic potential exit scenarios

This normally SLOW process goes faster if you have all these data points ready for review

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Poland, 2017

The angel funding process: 4. Investment

• Common deal details and discussions about deal structure:
• What the angels get for the money: they might get equity in a priced round, convertible debt, preferred shares, etc.
• Amount to be invested
• Board seat for angels
• For priced round, agreed-upon valuation and percentage of company owned by angels
• Milestones you will hit after your take funding; whether or not investment will be released in tranches at key milestones
• Angels will offer you a term sheet with investment details and investor rights
• Your startup and angels agree on final deal structure
• Lawyers on both sides review; founders and angels sign; cash your check

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Poland, 2017

The angel funding process: 5. Update investors

• Most angel groups meet once a month; give them a brief document or email in advance to show you are organized and fulfilling your part of the founder-investor relationship
• The short-list report:
• Short status updates about major initiatives, milestones hit or missed, major customers, partnership
• Status of product development, testing results, beta tests, IP opportunities, hits or misses
• Key financial metrics, esp. Actual versus forecasted revenues, cash on hand, current burn rate, progress toward break-even
• Whether or not you are seeking more capital; status and potential issues or changes
• Hiring / firing key individuals, stock option plans, compensation
• Key customers you’ve landed, major marketing initiatives, sales successes
• Provide board meeting schedules and advanced notice on significant issues that investors will need to address

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Poland, 2017

Housekeeping for aspiring angel-backed startups

• Incorporate (you need an employer identification number for tax purposes; establish as an LLC or C corporation)
• Lawyer up: establish a relationship with a lawyer experienced in startups; do “not” pay a hometown general practice lawyer to learn on your dime about term sheets
• Get financial and accounting help: establish fee-based part-time relationships with a CFO consultant and accountant. Expert financial and tax advice keeps you out of trouble when the due diligence starts
• Set up banking: open a business bank account for the startup; get a credit card and set up a line of credit; keep your personal finances separate
• Create in-house accounting systems: QuickBooks, whatever, make it so.

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Poland, 2017

Other topics related to Angel Investing

Know how to create pro forma financials (knowing that most financial projections, especially “top-down” are laughable; Poland, 2017) (fewer than one in a thousand startups meet or exceed their projected revenues in the periods planned, Berkonomics.com, 2012)

Milestones and adding value to your startup by reducing uncertainty

Intellectual property: the protections that will induce angels to invest

Valuation - understand valuation before you talk to angels

And much more, all covered in Armstrong’s new venture finance course!

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What’s in it for me?

Make sure your startup is angel-investment-ready before you start establishing relationships with them; validate your key assumptions, build a milestones time table, know your cash burn rate and financing needs; they are busy people, what kind of first impression do you want to make?

Understand that getting an angel investment is a multi-stage process and that some angels are better suited to partner with you than others (education, experience, individual versus group, mentoring capacity)

Start professionalizing the way you run your startup, milestones, cash burn rate, key hires, go-to-market strategy, validation processes

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