Are you thinking of raising angel investment for your business?
Firstly, what is Angel Investment?
An angel investor is a high net worth individual who makes use of their personal disposable finance and makes their own decision about making the investment.
The investor would normally take shares (an equity stake) in your business in return for providing equity finance (funds). In so doing, they normally seek to not only provide your business with money to grow, but also bring their experience and knowledge to help your company achieve success.
They can invest alone, or as part of a syndicate (a group of angels). Every angel investor has a different appetite for investment, and usually invests between £10,000 – £500,000. Deals of up to £2m are becoming more common, due to syndication.
Angel investors seek to have a return on their investment over a period of 3-8 years. They therefore look to see if your business can fulfill certain criteria from the outset.
Below are a some do’s and don’ts to get you started, before you decide whether this type of funding is right for you.
1) Don’t think that funding will save your business
Bill Gross CEO of Idealab, the longest running technology incubator with over 150 companies and 45 IPOs and acquisitions under their belt, presents in his well known TED talk the five key elements to the success of a startup. Here they are, in order of importance:
So there you have it. Funding is only one of the enablers. Funding is not what will make your business a success. Despite what you might think, a business rarely fails because it hasn’t received funding. Often, the reason it fails to get funding is because investors saw that the business was lacking in one or more of the other 4 areas.
Your goal should be to build a successful business, that solves the problems you and your potential customers feel passionate about, in the best possible way you can imagine. Not to be successful at raising round after round after round.
2) Do validate your core business assumptions
Before asking someone else to invest their money in your business, you need to know: what are the assumptions you have made that need to be true for your business to succeed? And how many of these can you prove are true?
In other words, validate your idea and your business model as much as you can before going out to raise. That way you will be confident that you are on the right path, and you will be able to inspire that confidence in others. If you haven’t done this before going out to raise investment, investors will see straight through you. The opportunity will feel too hypothetical and risky and they are likely to pass.
Even if the assumptions you rely on for your product to work - for example, that a majority of people use an app to order take-away in London - seem obvious or intuitively true, believe me they might not be! So get the data to back this up. Prove to yourself and to others that your assumptions are objectively correct.
This is often done by building what’s called a MVP - a Minimum Viable Product. Build a super basic version of your product, trial it on a small scale, and ask questions to the people using it. Ask A LOT of questions, ALL the time. But most importantly, ask the RIGHT questions. You need to establish whether people like your product, and whether they like it enough to pay for it.
To make sure you are asking the right questions, check out The Mom Test .
This is always going to be a process, but the more validation you have done, the more confident you will be, and the more you will come across that way to an investor. It will also help you measure the task ahead – and whether you are up to it.
3) Don’t raise if you don’t have to
Before you go down the long and scary road of getting “investment-ready”, think about alternatives. Could you fund your business in any other way? For example, could you fund your business to profitability yourself, by reinvesting your profits and slowly building up your product and your sales? Granted, this is a slower route, but a very viable one. You can build a sustainable business from the start and you stay in full control. Or could friends and family help with a cash injection, for example? Could you get a grant or a loan? Have you considered the new and wonderful world of crowdfunding?
Of course, other routes have their pitfalls too. But explore all options. Not all businesses are right for investment. And not all successful businesses are funded through private equity. This only suits risky but with high growth potential and often technology businesses (because they are scalable, quickly). You also need to be able to demonstrate how an investor would get his money back (and then some!) within an acceptable timeframe (currently anything between 3 to 7 years). You need to be very ambitious with your business, it cannot be a lifestyle business or a side project.
So have a long and hard think about whether there is another way, and whether it might be better suited to you and your venture.
4) Do look for an investor that’s right for you
Every investor is different. Look for and bring on board investors who really get you and your business. Make sure they understand your obsession with solving the problem, and want to help you solve it. Do they know or understand your market? Are they aware and on board with the assumptions you are making and the risks you are taking? If nothing else, this avoids them being shocked and confused when things don’t quite go to plan six months down the line and you need to pivot or raise some emergency cash.
At a very early stage, you can take this a step further, and try and find investors that have something valuable to bring to the table. Early stage investors like to get involved and get their hands dirty, so let them. But make sure they have skills and expertise you can tap into. This also helps you make peace with the fact that you are giving away little bits of your business to strangers. It’s not all about the money, they can add huge value to your business and take some work off your plate.Finally, make sure they have a great network and that they are willing to open it up to you. And find out at an early stage if, provided you deliver, they are willing and able to follow on their investment in future rounds.
Raising investment from angels or small institutions, even if it’s not much, is going to be hard. So make sure it’s right for you and that you understand what you’re getting into before you get started.