How to Make Your Startup Attractive to Angel Investors

Angel investment is one of the most common capital sources for both startups and relatively new companies looking to expand. But drawing high-net worth individuals toward an early-stage enterprise or business proposal requires well placed effort. First of all, angel investors can’t fund something unless they know it exists, which means you’ll need to focus on getting the word out in the right circles. Second, they’re unlikely to bet on a venture unless it offers a substantial return. So a sound business plan and credible growth and revenue strategies are key.

However, according to research by Shai Bernstein (Stanford Graduate School of Business), Arthur Korteweg (University of Southern California Marshall School of Business), and Kevin Laws (Chief Operating Officer of AngelList), arguably the most important factor is the quality of the personnel that the candidate organization has assembled.

Exceptional founders, and a reputable team.

Bernstein, Korteweg, and Laws’s analysis indicates that the presence of visionary founders and reputable staff on a startup’s team is a big draw for angel investors. The data further suggest that experienced angels are likelier than inexperienced ones to emphasize the importance of the people factor. Angels with a lot of investing background are also likelier to take a chance on a promising startup or fledgling enterprise than are newcomers to the profession, who may prefer to “play it safe” by betting on companies that already have some traction.

Seek out promising angels, and do research on them.

Many angels specialize in a particular industry or niche, and it’s a good idea to seek out individuals whose areas of interest or specialization accord with your own, particularly if your proposal is esoteric or technical. Find out what sort of endeavours those investors have funded in the past. You can even attempt to contact previous beneficiaries of the angels you’ve identified as prospective funders of your project, to ascertain what worked in the past and what those angels tend to look for.

A strong pitch.

If you’ve ever watched a full episode of the American network television program Shark Tank—or its Canadian counterpart, Dragons’ Den—you may already have a good idea of how to distinguish a high-quality funding pitch from a lousy one. If angel investors invite you to pitch to them, you need to be ready.

Aim for a duration of around ten minutes—enough time to cover all the essential information without rambling or rushing. If your presentation is in digital format and consists of slides, anticipate spending around one minute on each slide. However, make sure you also have an analog Plan B in case of technical difficulties, which have a nasty habit of cropping up unexpectedly right at the moment of truth.

Unconventional ideas can be powerful in the business world, but in the context of a funding pitch, a pair of conventions are worth observing. One is appropriate attire—you should strive to portray yourself as a consummate business professional and/or choose an outfit that’s suited to your line of work. Another is the hook—you should begin the pitch in a way that piques the investors’ interest. Present them with a problem or dilemma they can relate to, and offer them an innovative solution.

 Answer the following questions in your pitch:

•  What have you and your team accomplished so far?

•  What does your target market/demographic look like?

•  Who are your competitors?

•  What is your strategy for both marketing to customers and delivering your product or service to them?

•  How do you generate revenue?

•  What do you anticipate your revenue stream would look like over the next five years if you met your funding goals? Is your assessment realistic?

•  How much money do you need from the investors to whom you’re pitching?

•  What is your endgame? Do you plan to eventually take your business public, sell to an established firm, or something else? (Angel investors like to know how they will recover their investment.)

Finally, rehearse your pitch until you know it like the back of your hand. Run it by a trusted friend—if s/he would invest in your business or proposal, there’s a good chance that an angel would too.

On Equity Crowdfunding

In the environment of tight credit that characterizes the global economy’s tepid recovery from the Great Recession, many entrepreneurs are turning to unconventional sources of startup financing. Equity crowdfunding, mediated through registered online funding portals, is one of the available alternatives.

In order to ascertain whether EC would be right for you, there is some basic information you need to know.

 

What is equity crowdfunding, and how does it differ from standard crowdfunding?

Unlike standard crowdfunding, EC involves more than simply donating money to a cause in exchange for rewards, perks, or goodwill—instead, equity crowdfunders acquire an ownership stake in the company-to-be.

EC differs from traditional equity financing in its potential to attract numerous prospective investors offering modest quantities of capital. Conventional equity financing, by contrast, often involves a small number of deep-pocketed investors capable of advancing large sums.

Advantages

•   Democratization (sort of): EC can foster investment opportunities for people of comparatively modest means. However, the rules governing EC (including accredited-investors-only restrictions) vary by jurisdiction, along with the required documentation. The situation is fluid, as governments learn more about a relatively novel investment tool and modify their regulatory frameworks accordingly. It’s a good idea for businesses and entrepreneurs uninitiated in EC to seek legal counsel, so as to ensure compliance with local securities regulations.

•   Breadth of investment pool: Not only can EC enable entrepreneurs and business owners to benefit from a broader pool of potential investors than might otherwise be available; the relationship is a two-way street. As EC expands and develops, small- and medium-scale investors will also have the opportunity to dedicate a portion of their savings to a vast array of endeavours that might otherwise have received little exposure.

•   You set the fundraising commitment. When businesses attempt to raise early funds through venture capital firms, they receive whatever those organizations are prepared to give—usually a small sum, unless you already run a thriving business with a steady revenue stream. EC, by contrast, offers entrepreneurs relative freedom to establish and adjust their own targets.

•   Your funders have a vested interest in the success of your startup. After all, the more profitable your venture, the more lucrative the returns for them. If you encourage equity funders to promote your business idea on social media and within their friend circle, they will likely be keen to oblige.

Drawbacks

•   Legal complexities: As noted above, the rules governing EC vary by jurisdiction. A lot of entrepreneurs just starting out in the business world may not be familiar with financial disclosure rules, licensing, comprehensive business plans, and other requirements, and will need to undertake a lot of advance research and due diligence.

•   Small- and medium-scale investors may lack business and investment experience. Sometimes it helps to be able to defer to the advice of an experienced angel investor, venture capitalist, or business professional, especially when it comes to dealing with adversity and managing the expectations of your funders. In particular, new investors may not fully appreciate the risks associated with online and startup investments.

•   Some of your funders may be people you’ve never met. Obviously, this entails issues of trust and fraud prevention, and there is a risk that disgruntled investors may try to litigate against you in an effort to recoup a portion of their losses if your business doesn’t pan out. This is another reason why seeking legal advice is a good idea.

To equity crowdfund, or not to equity crowdfund?

EC may not be suitable for startups that lack a strong social media following, or that don’t offer a product or service that is marketable and compelling. For example, many of your Facebook friends may be interested in funding a bicycle store or a pet daycare; relatively few will be keen to support a more esoteric or specialized venture, like a business that designs refrigerator door hinges.

If you’re still interested in EC, I recommend this article in the Globe and Mail, by SeedsUp.ca founder Sandi Gilbert, as a basic guide to help you get started.

Equity crowdfunding portals, and useful links:

SeedsUp.ca—one of the first EC portals in Canada.

ncfacanada.org/equity-crowdfunding—a page devoted to EC, from the National Crowdfunding Association of Canada.

CloudFund.ca—another Canadian EC portal, in development at the time of this writing.

Alixe Cormick is a securities and small-business lawyer with expertise in Canadian EC regulations. She has penned an informative blog post on the subject, available here.