«Note on Angel Investing Introduction An angel investor is an individual that uses his or her own cash to invest in early stage companies. This note ...»
Always be on the lookout for opportunities to help the startup. An angel often has industry networks that can be great sources of valuable information. Entrepreneurs can become so focused that they do not realize major trends are shifting or simply do not have time to network appropriately if they are deeply involved in product development, for example. Angels can be the eyes and ears of startups, and angels can help find good potential employees through social networks. Angels can also find other angels and venture capitalists for further rounds.
Diversify your risks by investing smaller amounts in more startups. Angel investments should be less than 10% of your portfolio, due to the risks of potential losses.
Set aside at least the same amount you invest in a startup so you can make follow up investments in future rounds. This will allow you to retain your percentage ownership or at least prevent it from being diluted too much.
Fund deals that you’ve shown to venture capitalists who have indicated they will fund future rounds if certain operational goals are met.
Know the ramifications of term sheet clauses in both upmarkets and downmarkets.
Appendix 4 describes details of term sheets.
Angels that perform most of the detailed due diligence or long term management of an investment on behalf of an angel group should be compensated with a small percentage of equity.
Do not overcontrol the entrepreneur. There is a reason why the entrepreneur has started his or her own company: he or she prefers to run the show. Even though an angel has provided capital that does not give the angel the right to wrest control from the founder, except of course if the business is not meeting its operational goals.
Best practices for entrepreneurs
Only 1% to 2% of all business plans presented to either angels or VCs receive funding.
Entrepreneurs need to read the necessary books and speak to individuals with financing experience or expertise so when the opportunity arises, they are fully prepared to present their concept to investors. Incomplete business plans are unacceptable in today’s competitive environment.
Ideas are a dime a dozen. Fundable businesses are those that can demonstrate that they have the products and people to enter a market and either take significant market share or dominate.
Use informal networks to be referred to individual angels and VCs. It vastly increases the chances that your business plan will be reviewed.
Invest capital in your own startup. Not doing so is a major red flag for investors.
Do not refer to angel investors as “dumb money”, regardless of who you are speaking with and especially in a public forum. Believe it or not, this has been done before. These kind of amateur mistakes will haunt you, because investors and VCs talk among themselves.
During the initial conversations with an angel group and during the presentation to the angels, it behooves the entrepreneur to find out which of the members are the real decision makers. This is difficult to ascertain but can be very valuable information because angels are human and they feel safety in numbers. The entrepreneur should focus on the more experienced angels and the managing directors of the angel group.
If groups of investors are interested, it is far better for them to invest as an LLC (limited liability company) than as individuals. VCs are weary of complex capitalization structures and an entrepreneur risks losing access to larger amounts of capital. In addition, major company decision making can become unwieldy if large numbers of investor/owners need to be consulting. This process can become like herding cats.
Finding an angel investor is like finding a spouse. Personal chemistry is critical because it is a long term relationship. This chemistry may take time to build so invest quality time in getting to know the angel. If you are dealing with a group of angels, it is the lead angel that will be on your board or that will manage the investment on behalf of others that should be your focus. It is far better in the long run for an entrepreneur to turn down an angel investment because of lack of chemistry and wait for a better match.
Keep the investor appraised of the company’s progress at least quarterly if not monthly.
If there are problems, alert the investor early about them. Involve him or her in developing possible solutions or finding the right people to help. Waiting until the last minute before disclosing major issues entails the risk of lawsuits from an angel for fraud or misrepresentation.
Conclusion Angel investors provide significant value to the overall economy by fueling entrepreneurial activity. Angels are distinct from venture capitalists and, although the demarcation line is blurring, angels continue to be the true initial investors in great ideas.
Entrepreneurs are responsible for knowing basic financing concepts, preparing well for investor presentations and choosing their financing partners carefully. A company can sometimes survive operational mistakes, but running out of cash means the company ceases to exist. By having a good understanding the financing process as well as the pros and cons of financing methods, entrepreneurs will increase the likelihood of their company’s survival and long term success.
1. Angel groups in the West Coast and northern New England
2. Reading list
3. Typical angel questionnaire
4. Typical financing term sheet concepts Appendix 1 - Angel Groups In West Coast and Northern New England
Appendix 2 - Reading List The Angel Investor’s Handbook: How To Profit From Early Stage Investing, Gerald Benjamin and Joel Margulis, Bloomberg Press, 2001 Winning Angels: The 7 Fundamentals of Early Stage Investing, David Amis and Howard Stevenson, Prentice Hall, 2001 Angel Investing: A Guide For Entrepreneurs, Robert Robinson and Mark Van Osnabrugge, Jossey-Bass Publishing, 2000 Every Business Needs An Angel, John May and Cal Simmons, Crown Publishing, 2001 Appendix 3 - Typical Preliminary Questionnaire From Angel Groups To Entrepreneurs
• Name of company:
• Year founded and legal structure (“C” Corp, “S” Corp, LLC, etc.):
• Who referred you to this angel group?
• Summary of business (in 3 sentences or less):
• What problem is your product or service solving?
• What is the size of the market, how much has it grown in the past few years, and what is its projected growth?
• Describe the competition (companies as well as substitute products):
• What are your company’s competitive advantages?
• Why will your company succeed in the long run?
• Does the company or its founders have any relevant patents or proprietary technologies? (please do not reveal specific proprietary information)
• What is the relevant experience of each member of the management team? Please enclose a one page resume of the CEO.
• What is the company’s sales and marketing strategy?
• If you have a website, what is the URL?
• What are the major short, medium and long range operational milestones you intend to achieve?
[continued in next page]
• Please complete the table below:
• Are 50% or more of revenues generated from one or two customers?
• What are the 3 greatest risks of this venture?
• What is your capitalization structure? (How many shares are currently owned by founders and investors? How much capital has been invested so far, and by whom?)
• How much capital are you seeking, and how will this capital be used?
• How many rounds of investment and what amounts do you expect to need in total?
• What is your exit strategy?
• Please list the name and company of your professional advisors (attorney, CPA,
• Who is the main contact person at the company? Please provide address, telephone,
mobile phone, and fax:
Appendix 4 – Typical Term Sheet Clauses