Many people today are excited at the prospect of starting and running a business of their own. While the excitement is good and welcome, most of them are blocked to pursue their own business because of insufficient funds. One of the most trending ways to raise capital by such businesses is to get the necessary funding from angel investors.What question is how to attract investors for Angel Funding?
However, raising money from angel investors is a task of undaunted courage itself. When you are told by people around you that it is not easy to raise capital from angel investors and there is a high probability that you will get shot down even before you do a proper presentation, they are not overstating the challenges that lies ahead.
An entrepreneur must understand that it is not easy to get an investor to put his money and trust in you in a matter of hours. An angel investor, someone who is willing to take a risk in the hopes of a high return, invests the much-needed capital in your business in exchange for an equity share of the company.
The good news is that while you are looking for angel investors to invest in your company, at the same time, these angel investors are in the lookout for businesses to invest in. However in this ever competitive world, you must stand apart to increase your chances for successfully bringing an investor to put the capital in your business.
Here are some tips that I am going to offer which will help you in standing apart from the crowd:
- Get your business incorporated
Remember that an investor is investing in your business in exchange of equity shares. Now, it is easier to carve up the equity shares in a corporate entity and this is where most of the investors reject the investment proposals from a company with sole proprietorship or partnership.
My advice to you will be to get your business incorporated first, if you want the angel funding to come to you. Does your homework properly before you choose to go for an S-Corp, a C-Corp or an LLC but act fast in any case.
- Assembling the best team that you can
Investors will always listen to your ideas but at the end of the day what really gets their ears is whether you have the team that is capable to turn the idea into a feasible product or deliver the service that can be marketed.
The uniqueness of your idea may create a buzz but without a competent team in sight, any investor will stay away from funding. On the other hand, you may get an investor to fund you even though you have got some good competition if he sees the potential of your team to deliver a swift and better result as compared to your competitors.
- Invest your own money first
- It may sound cliché but the investor community is not going to take you seriously if they don’t see you investing in your idea yourself. It is just ridiculous to expect someone to invest in your idea, when you yourself are not willing to do it. Rule of thumb – Ante up if you want the funding to flow in the pot.
- Build a prototype
While it is true that angel investors get associated with a business at very early stages, yet most of the investors are not really convinced till they see for themselves a “proof of concept”. Hence, I will advise you to build a prototype first before you start reaching out to investors.
The biggest advantage that you get by building a prototype which you now have to focus your pitching strategy to the investor towards scalability of your product or services rather than the feasibility. While building a prototype itself may need some capital, finance this yourself or with help of friends and family. Crowd sourcing is also a good option, for this part. (Read more about crowd sourcing here:http://www.crowdsourcing.org/)
- Draft your Business plan
While as an entrepreneur, you may presume that everyone shares your vision going by your words and the passion you display but the truth is that it impresses nobody. You not only should have a well-laid business plan but also you should know it, in and out. You should be ready with the answer for every question, which an investor may ask.
What should be highlighted in your business plan? Your business plan is always scrutinized closely by the investors. You should make sure that your business plan highlights the following
- What makes you different
- Who are your competitors in the market
- What competitive advantage you hold over them? If you have any patents, proprietary processes, trade secrets etc., list them here.
- What is the current market share of your competition and where do you stand before it?
You may additionally choose to include any future competitor i.e. businesses which currently caters to a different segments of the market but may come up as a direct competitor in foreseeable future.
You must provide the source of your data that you have used for various estimates. Do not go for dramatic and unrealistic data; rather than impressing your potential investor, you will end up creating distrust between him and you or will leave an ignorant and naive impression of yours.
Present a fair SWOT analysis of your business plan and list down the ways in which you are going to handle the opportunities and threats.
- Finalize your Financial Model & Operational plan
Your financial model is the area that an investor is most concerned about. You should well-define your projections and solidly base all your assumptions that drive these projections.
You should do a break-even analysiswith the help of these projections to calculate the amount of revenue which will cover the initial investment
You need to give detail analysis of all the sources of revenue generation which may be product sales, services, licensing or advertisement and justify your basis of this analysis. Remember that all the in-depth technical details about your product or services may bore the investor since he is not the end-user but no matter how much in-depth analysis you provide on revenue generation, you will always have the attention of the investor as it directly concerns him.
An investor is always eager to know, and rightfully so, how are you planning to spend the money and why do you think it is the best way to spend it that way? You must be ready with all the expenses and their justification, in order to answer this question.
One of the most common observation is that most of the entrepreneurs underestimate the one-time start-up cost like new equipment, office furniture etc. Besides, you must have correct estimation of recurring costs such as rent, salaries, inventory, maintenance etc. I will also advise you to give the names of key suppliers and/or distribution partners, if any, at this stage.
Finally, include in your presentation the best case, expected and worst case scenarios. Explain how your business will fare if and when it hits a rough storm. A balanced stress-testing reflects your thoughtfulness and adds credibility.
- Zeroing in on Customers
Try to find at least one customer who is willing to pay for your product or services. You will more than impress the investors if they see that you have customers lined up who are testing your product and are committed to buy it if your product solves their real world problem. Please note that this does not include the free trials that you are offering to some customer but customers who are willing to pay real money for the potential use of your product or service.
You can pitch a lot of market research and quote all the things that business strategists have to say about the future of your business, but nothing can convince an investor more than paying customers in the real world because this is where investors estimate your revenue growth and validate the pricing strategy.
- Targeting the right investor
It makes more sense for an investor to invest in an industry they themselves have a good idea about and hence, they restrict themselves to investing in a particular industry segment. Most of the investors are successful entrepreneurs and businessmen themselves.
This is why you should select your investors wisely as investors are more excited about investing in a field they have prior industry experience in. Besides, such an investor adds value to your business. You can get benefit of their prior industry knowledge, creative ideas, guidance/mentorship and most importantly, contacts.
You will sometimes be astonished yourself at how much easier it becomes when you have a good deal of contacts. Financial funding is the primary objective to look out for an angel investor but if you successfully landed with the right investor you will be getting help in many other ways too that you would not have imagined.
- Be oriented
You can’t expect a person to just sign a check for you based on a pitch and walk away. Angel investors are seasoned businessmen; they will be doing due diligence on your work, before shaking the hands and closing the deal. Keep your financial statements in order.
A referral document and early projections will attract their attention. You must ensure that you are not projecting your business simply on previous trends and facts. Getting an investor to believe in the potential success of your plan is the key here.
- Manage your time
Be prepared for a long round of discussions. Angels’ concerns are way too difficult to satisfy owing to their due diligence process. Moreover, it is usually not a single person, you are dealing with. You may get to talk with many people involved in the process as your project progresses and this poses a real challenge to your patience and understanding of the system. If you are looking for a huge amount of funding, expect to spend quite some time on discussing and getting responses.
There will be many discussions, back and forth. This process may go on for 3-6 months, even longer in an uncertain market. Remember your passion can keep this going. Being thick-skinned and following up consistently with sincere and well-researched responses to any of the investor’s queries will ultimately lead you to success.
- Past market response to similar ideas
You must be prepared with answers to the questions from the investors on the lines of how the market has responded to ideas that were similar to yours. For this, you need to pre-research the ventures that came before you in the same segment but failed.
Take down all the learning from their mistakes and keep in mind what did not go in their favour and what is your strategy to handle it. Similarly, research on the successful ventures –what was their approach, what went into their favour and how you plan to beat them. This step is more for your own learning and the investor’s motive behind such a question is to test your level of preparedness.
While nothing is guaranteed, no matter how much of preparation you put into, yet these points will definitely help you stand apart of the crowd. It is not unusual for an entrepreneur to devote almost 50% to 70% of his time in raising funds from angel investors. There will be many discussions back and forth with the investor. As part of their due diligence process, they might be raising various concerns and objections. You must understand that raising investment is a time taking process. Your ego will be challenged every now and then. Be persistent and thick-skinned. As long as you believe in your business, you will find the angel you are seeking.