Thoughts on startups by investors that
fund them & entrepreneurs that run them

How would you break down the process of raising an angel round of investment in 5-10 steps?

1. Understand your business. It sounds obvious, but the majority of entrepreneurs who pitch me have obviously never thought through many of the major issues surrounding their companies.  You should know EVERYTHING about your business, product, customers and competition. You should know every metric regarding customer acquisition, conversion and retention. You should have a crystal clear understanding of your business model and your financials. And all of this should be at the tips of your fingers so you can instantly answer any questions you are asked about it.

2. Understand what investors are looking for, what they usually invest in, and why. There is a vast gulf between a ‘cool product’ and an ‘investable company’ and if you don’t understand the difference, you will be doomed before you start. There are many good books on this subject, and you owe it to yourself to read at least one of them before you begin talking to angels. A good beginning would be Bill Payne’s The Definitive Guide to Raising Money from Angels, available as a free download from http://gust.com/definitiveguide.

3.  ONLY after you’ve completed #1 and #2 will you then be ready for capital to be applied to your venture. And that capital is going to come from…YOU. That’s right, you should not even consider trying to raise money from anyone else until you have reached deep into your own pocket. This is the case for two reasons: first, because the bare fact is that investors simply do not fund ideas. The expectation is that in an era of increasing technology and decreasing costs, you will be bringing them an operating company with at least some traction. Looked at from their perspective, given two teams equal in entrepreneur, market, business model and potential, why should they invest in one that exists on paper, when the other has reduced its risk and improved its viability by actually getting started?  The second reason is that investors want to know that YOU believe in your own startup…and the best way for you to demonstrate that is to show that you have personally put your own money where your mouth is. Keep in mind that any cash you put in will remain in the company as Founders’ Equity, and will only come back to you on a successful exit in which your investors make money.

[3a. Although it is not required per se, and therefore is not being given its own discrete step here, in the real world most startups at this point turn to friends and family for additional capital, in the form of equity or loans, to help get the company to a stage at which it is legitimately investable by third parties. The important thing to note about this is that the money should either go into the company directly as a convertible note without a cap, or (depending on the personal relationships involved) as a personal loan to the entrepreneur, which he or she in turn invests as equity into the company, but will be responsible for repaying even if things don’t work out.]

4. With #1 – #3 under your belt, you should start preparing the components you will use to support your pitch to outside investors. These range from outbound materials, such as pitch emails and funding applications, to presentations of your venture in different forms for different purposes, to detailed back-up information that you will be asked to supply during due diligence. A comprehensive list of things you might want is listed in the answer to What materials or software should I use to pitch a VC?, and these can all be neatly gathered into a confidential investor relations site, such as you can create with Gust.com.

5. Now, and only now, are you prepared to start fundraising. This phase is a combination of (to mix several metaphors) WMDs and sniper fire.  Start by letting absolutely everyone know that you’ve got a great startup looking for early investors. And I mean *everyone*. I have been led to deals by my barber, my interns, my cousin and my high school classmates. If you hide your light under a bushel, investors simply will not come looking for you proactively. At the other end, do your homework to really understand which investors would be the most productive for you to approach. Some only invest in their home city, others only invest $5,000, still others only invest in biotech, for example. Blindly sending your business plan to every single angel and VC in the world will have zero effect, and simply clogs the system while annoying everyone.

6. Seriously consider applying for funding from your local business angel investment group. There are many hundreds of these across the country and around the world, and virtually all of them accept applications over the transom. If you are invited to come in, even for a preliminary screening, you will have the opportunity to present your business to experienced investors. This will given you both pitching experience and usually solid feedback on your plan. And if you do get funded, the group can be extremely helpful in getting other investors to join in with additional funds.

7. Another avenue that is increasingly a good idea is to consider applying to one of the new breed of accelerators. While yCombinator and TechStars are the two best known, there dozens of others, local, national and international, many specializing in specific areas (including fashion, food, finance, gaming, etc.) Accelerators typically provide several months of intensive mentoring, at the end of which they host a Demo Day to introducing all their graduating companies to a large number of local angel investors.

8. Your goal in all this is to try to find a lead investor. This person will be critical in rounding up other investors, drafting a term sheet, and generally getting the deal done. He or she will be your primary champion, and often mentor. Doing a deal with a lead investor is 3 to 5 times easier than trying to pull everything together by yourself. Among other things, your lead can vouch for you with other investors in their circle, or who follow them on online financing platforms, which can be a good way to finish up a round (via “social proof”) once your leads are in place.

9. Before you start negotiating a term sheet with any potential investor, make sure that you GET A LAWYER, specifically, a lawyer with experience directly in the early stage financing world. This will NOT be your family lawyer, or the one who helped you beat that traffic ticket. There are excellent venture lawyers in every major city, with enough to form a flash mob in places like California, New York and Texas. For more background on this key step, see the answers to “What should one look for in a startup lawyer?”

10. Finally, from the minute you begin engaging with an investor, it is critical to COMMUNICATE early and often. Keep them up to date while circling your round, thank them as soon as it closes, and provide ALL your angels with either quarterly (at a minimum) or monthly (ideal) reports on how the company is doing.  In my experience there is a astounding correlation between frequent, thorough communication and successful follow-on funding.

*original post can be found on Quora @ : http://www.quora.com/David-S-Rose/answers *

Written by David S. Rose

user David S. Rose Founder and CEO,
Gust

David has been described as "the Father of Angel Investing in New York" by Crain's New York Business, & a "world conquering entrepreneur" by BusinessWeek. He is a serial entrepreneur & Inc 500 CEO who chairs New York Angels, one of the most active angel investment groups. David is also CEO of Gust.

prev next

You might also be interested in

The Discipline of Execution Defines an Entrepreneur

When entrepreneurs come to me with that “million dollar idea,” I have to tell them that an idea alone is really worth nothing. It’s all about the execution, and investors invest in the people who can execute, or even better, have a history of successful execution. Execution is making things happen, and for startups it usually means making change happen,

Read more >

10 Incentives For Entrepreneurs To Bootstrap Their Startup

Image via Pixabay

I’ve always wondered who started the urban myth that the best way to start a company is to come up with a great idea, and then find some professional investors to give you a pot of money to build a company. In my experience, that’s actually the worst way to start, for reasons I will outline here,

Read more >

The Right Startup Advisors Are As Valuable As Money

Warren Buffett advises President Obama, image via Wikipedia

If you are a new entrepreneur, or entering a new business area, it’s always worth your time to assemble an Advisory Board of two or three executives who have travelled that road before. You need them before you need funding, and if you select the wrong people, or use them incorrectly, no

Read more >

Surround Yourself With People Smarter Than You

Einstein image via Flickr by Sebastian Niedlich

Helpers do what you say, while good help does what you need, without you saying anything. People who can help you the most are actually smarter than you, at least in their domain. Top entrepreneurs spend more time putting the right team in place to accomplish their objectives than they spend on any

Read more >

The Planned Iteration Startup Launch Minimizes Risk

Eric Ries on Lean Startup methodology, via Wikipedia

The traditional mode of starting a company has been to plan a serial process, where you complete once all the steps, leading to the “big bang” launch of the company. I strongly recommend a dramatic departure from this model, called “planned iteration” or Lean Startup methodology, where you assume you won’t get

Read more >

Comments