You have this great business idea which you have decided to go with, something that you truly believe in and are passionate enough to let go of your comfortable fat pay-check, then do not let anything stop you from starting your own business.
To start your own business is as scary as it is exciting. One of the biggest concern before someone who is starting their own business is the source of funding before the business starts generating significant revenue. In today’s market, you want to act fast and gain the leverage of being the early mover. The competitive landscape, at the same time, will not allow you to compromise on anything. Even if you don’t have a direct significant competitor at the time, you must be ready to face stiff competitors within months of onset of your operation. This necessitates that you must have sufficient capital with your business so that you do not get pushed back or pushed out by your competition.
What options do you have for raising the required capital?
There are various ways to collect the necessary seed fund. I am listing a few common ones here
- You can start with investing your own money, taking help from your friends and family.
- You can also apply for a small or medium bank loan.
- Another new bright way of raising capital in the modern time is Crowd sourcing. Crowd sourcing, in reference to investment specifically, refers to collecting the needed capital by taking contributions from a large group of people and especially from an online community.
- The most traditional way to go forward for capital funding is to land with an angel investment.Start a business with angel funding.
What is Angel funding?
An angel investor, someone who is willing to take a risk in the hopes of a high potential return, invests the much-needed capital in your business in exchange for an equity share of the company or convertible debt. These investors are successful entrepreneurs and businessmen themselves who, besides their motivation of huge potential return, also want to nurture the young entrepreneurs with their experience and skills as well as to be at the helm of latest industry developments utilizing the potential and energy of the next generation. This is why most of these angel investors restrict themselves to an industry they understand and have some prior experience.
There are some legal formalities that are to be met for someone to be in the club of angel investors. The angels need to meet the Securities Exchange Commission’s (SEC) definition of accredited investors. Their net worth should at least be $1 million and they must make $200,000 a year or $300,000 a year jointly with a spouse.
You, however, should be least occupied in legalities and should be concentrating your energy on how to get angel funding. You should understand that it is not so easy to get an investor to put his money and trust in you in a matter of hours. Understand that an investor simply does not share the same vision or passion for your business as you do, and hence you have to pitch hard for bringing him/her on-board. The good news is while you are seeking an angel investor, angels are also in lookout for good business prospects to invest in.
Since there are a lot of start-ups which are constantly pitching their business plan to these investors, you have to make sure that your pitch is different from those of your competitors. You must make yourself stand out from the crowd if you want the funding from angel investors. Most of the entrepreneurs are disillusioned that their business is going to succeed because their idea is unique. However, they very soon realize that there are no takers for their idea alone and then, they start wondering what really interests an investor.
My advice to all you budding entrepreneurs is not to start contacting any investor until you have your “pitch” ready, as it will be waste of opportunity. Besides you will spoil your crucial “first impression”. Once you get your pitch ready, you fine-tune it and then, get into the mission mode, to attract the angel investors. Let me share with you some very important points which will help you stand out from the crowd and get the interest of investor in your business.
How to get funding from angel investor
- Invest your own money initially
- It may sound cliché but the investor community will not take you seriously if you yourself are not willing to put money on your own idea. Before you expect someone else to fill the pot, it is expected of you that you are the first person to put money in that pot. Take help from friends and family additionally.
- Assemble a capable team
- Investors will listen to your ideas but at the end of the day what they really look at is your team. An old adage goes: “Investors fund people, not ideas.” The uniqueness of your idea is welcomed but without a competent team in sight, any investor will stay away from funding because in their line of work, they have seen many great ideas failing, because those ideas were not well-executed. Hence, you must make sure that you have a skilled, motivated and capable team.
- Find the right investor
While investors themselves don’t want to get into a business they don’t have some knowledge about, you on your own part should also keep away from investors who are from a different industry. An angel investor besides providing the capital to your business also adds value to your business. An angel with good connections and past experience not only can give some creative ideas and guide your team but can even make it easier to get additional rounds of funding.
Also try to understand the expectations of the angel for exit strategy and ROI (return on investment) and whether they are converging with your own vision for the company or not.
- Draft your Business plan
Before you are out to meet your potential angel, you not only should have a well-laid business plan with you but also you should know it inside and out. Your business plan should answer any possible question that an investor may ask. You should give enough detail about the competitive landscape, what competitive advantage you hold over your competitors (highlight the patents, proprietary processes, trade secrets), what is the current market share of your competition and where do you stand before it.
Do provide the source from which you have gathered the data that you used for various estimates. Never go with unrealistic data; instead of impressing your potential angel investor, you will end up leave an ignorant and naive impression. In worst case, you will lose the trust of the investors. You should also include a presentation of SWOT analysis of your business plan and list down the ways in which you are going to handle the opportunities and threats.
- Do due diligence over your Financial Model & Operational plan
It is no secret that your financial model is the area that an investor is most concerned about. You should make sure that your “pitch” is not missing out on any of these
- You need to well-define your projections and base all of the assumptions which derive these projections on solid data and market research.
- You should necessarily include a break-even analysis to calculate the amount of revenue that will cover the initial investment with the help of these projections.
- You should provide detailed analysis of various sources of revenue generation viz. product sales, advertisement, licensing or services and justify your basis.
- Remember that the investor is not the end-user and hence, do not bore him with giving too much in-depth technical details about your product or service. Where you should go for in-depth analysis while giving your presentation is the revenue generation model; believe me, you will always have the full attention of the investor at this point of time, as it directly concerns him.
An investor is always interested in knowing that 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 respective justifications in order to answer this question.
One of the most common observation is that most entrepreneurs underestimate the one-time start-up cost like new equipment, office furniture etc. Do your home-work properly. You must also be ready with a good estimation of recurring costs such as rent, salaries, inventory, maintenance etc. My advice will be to list out the names of key suppliers and distribution partners, if any, at this point.
Finally, perform a balanced stress-testing and include the best case, expected and worst case scenarios in your presentation. Explain how your business will fare if and when it hits a rough stage.
Things to know before pitching to angel investors
While we already discussed how to build a strong “pitch” in the last section, we also must plan on how to approach the investors with the pitch that we have. Understand the importance of “first impression” and how you must make it count. If your first impression goes wrong or even on the lines of “just another average idea”, you should be prepared to forget getting any additional round of discussions with those investors. I will recommend you to keep the following points in mind before approaching your angel(s)
- Be oriented
- You can’t get a person to talk money, sign a check for you and walk away. Angel investors are experienced businessmen; they will be doing thorough research on your work, before stepping ahead. Keep your financial statements in order, a referral document and early projections will attract their attention. But remember; do not project your business simply on previous trends and facts. Getting them to believe in potential success of your plan is the key here.
- Customize your business model
- Remember that investors have multiple offers to select from and it is up to you to deliver onto them, in your first impression. Plan your strategies in the manner which suits the business requirements. Following the forecast model is not going to help you. Your ideas and solutions should seem unique to the market scenarios.
- Prepare to deliver
- Always keep your goals clear, as to what solution you are looking up to and why you need to raise so much money. Be specific when they question you, communication can make the difference. Most often, you get only few minutes to present your idea, only a few striking opening sentences can buy you enough time to interact with them. Know your business, market and competitors thoroughly. The investor should be able to translate that your idea is going to rise and that their financial returns are in place.
- Exit plans
- Only ambitions and energy don’t run a business. You ought to be prepared to adverse market responses and failing at competition. Know your valuation and how do you plan to cope up when the market turns down. The investor needs to have faith that his money is not exhausted completely without even original amount recovery, lest potential returns.
- Customer approach
- Keep this point always in mind. What customers are you targeting and what solution does it bring them to you. Customize your idea as to what a prospect customer would want. Try to explain the benefits, what you have been experiencing and what you investor, being in the place of customer, would feel.
- Manage your time
Be prepared for talking. Angel investors’ concerns are way too difficult to satiate, owing to their due diligence process. Moreover, it is usually not a single person, you are dealing it here. You may get to talk with many people involved in venturing as your project progresses and that poses a real challenge to your patience and understanding of the system. If you are looking to a huge amount, expect to spend quite some time talking and getting responses.
There will be many discussions, back and forth. This process may go on for 3-6 months, even longer if the market is uncertain. Remember your passion can keep this going, giving up has never been good to anyone. Being thick-skinned and following up consistently will ultimately lead you to realistic goals.
- 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.
- Nothing is final until money is in your account
- Getting a positive response from an angel is very heart-warming and all but it should not make you too comfortable or take anything for granted. You should not go slow on chasing additional angels and pitch to them with the same sincerity until you have closed the deal with an angel for the required funding and the money is transferred to your account. Only when you have met your targets for the funding, you should end the process of meeting new investors.
- Raising capital requires expenditure of capital
It would be unfair on my part if I do not tell you, or tell you otherwise, that hiring professionals to assist you with the capital raising process highly increases your chances of successfully raising the capital for your business. These professionals might help you with consulting, accounting, legal or investor introduction services.
You must decide for yourself that what services you must hire and what you can do without. In any case, make sure that you are not jeopardizing your chances with a prospective investor just because you decided to go for cost-cutting on an essential service.
In conclusion, while building a start-up is a tough decision, raising money for it with angel investors may even be a tougher task as holding onto the responsibilities and facing all the challenges with positivity needs guts. But if your approach is right and you plan to work on realistic goals, this can be achieved. They say the only thing that is certain is change, and also that change is seldom welcomed; hence, you need to stick on and manage your work model, be flexible to demand and keep moving. All the best!