What makes a great angel investor?

There was a great blog post that recently listed the five key traits of angel investors. Here is a summary of the characteristics mentioned in the post:
1. Relevant experience and knowledge in the industry of the startup
2. Large network with relevant connections
3. Willingness to learn as much as you are willing to teach
4. Ability to provide time and empathy during tough times
5. Long-range thinking

I would argue that these are important skills that are relevant for just about any profession and they are also skills that I'm always continuing to build on. The first two traits come with additional experience in the field and take longer to develop, but the last three traits are ones that people can start on right away. The fourth trait is probably one that females have an inherent advantage, since empathy is often a trait that comes more easily to women (and one can argue that aggressiveness and risk-taking come more easily to men, which are other skills that can be helpful to investors).

Another great female angel network that I came across is the Women's Capital Connection.  The network was launched three years ago with 32 investors, who commited to investing in women-led ventures. The group started out in Kansas City and has invested over $1mm in five female-led ventures. They've also expanded to nine other similar groups and locations across the U.S. These amazing women of WCC are helping shape the future of angel investing, while sharpening their own financial and investment skills, mentoring other females, creating wealth and jobs for local communities and investing in women's futures and ideas. That's a very inspiring goal for us to strive for! 

New Angel Fund in Chicago

Just last week a new angel fund, FireStarter Fund, was launched in Chicago with members that include some of the big names in the Chicago tech scene including Excelerate Labs' Troy Henikoff, New World Ventures' J.B. Pritzker and CEC's Kevin Willer. There are more than 40 angel investors who have joined the group and each member will be contributing $100,000 or $200,000 to the fund, which will provide a good chunk of new seed stage funding for Chicago's startup scene.

The fund is structured a bit differently than the other major Chicago angel funds (Hyde Park Angels, Cornerstone Angels, and Heartland Angels) in that the majority of the members do not need to vote to fund the startup. In fact, as few as six members can say yes in order for the fund to invest a small amount in a new company. Each member also has the option to co-invest in the companies that pitch to the fund, so in the event that a member finds a startup they think is very promising they can invest more than the $200,000 they initially put into the fund. In the first four years of the fund (in total it will be a 10 year fund), the group expects to make 15 to 20 investments at $150,000 to $350,000 per investment, which is smaller investment amount than some of the other angel groups.

This new structure is especially appealing to startups, since many angel funds tend to be very bureaucratic and need majority vote in order to approve new investments. If everything goes well with this new angel fund, older angel groups may consider changing some of the rules they currently have in place to allow for this added flexibility.

Angel Investing Trends for the New Year

There was a recent article on the Fox Business website about Angel Investing Trends for 2012. I have to agree with the fact that investors must be getting frustrated with seeing the same type of startups over and over again.  One investor mentioned they are very tired of seeing companies related to social networking, group commerce and music sharing. One trend they did mention that I also think is going to be big this year is technology geared toward baby boomers. Especially with the growing aging population in the U.S., this is a great segment for new companies to target.

Also, the use of such websites as Gust and AngelList have grown significantly in the startup and angel investing community, so if you’re looking to raise money or connect with early-stage investors and company founders, these are great resources to start using.

What exactly do angels look for?

Below are some specific characteristics that the angel investors at the panel event had mentioned they look for:

-          Unique technology or technology that is patentable or a trade secret (i.e. something that doesn’t need to make it solely on marketing)

-          Good people who know how to work in capital-strained environments and can do a lot with very little resources

-          Entrepreneurs who are flexible and know how to fail early or “pivot” their business model if they need to

-          Demonstrate that you really know your industry and business

-          Having a history of other early ventures can be a huge benefit. Even if the prior companies weren’t a success, showing that you learned from your mistakes and knowing how to not make them again is a big advantage.

-          Market validation and customers who are willing to pay for your idea/product

-          Angels are often looking for pre-money valuations that are less than $3mm and they expect the entrepreneur to come in with an idea about the valuation of their company. Although in the end, the angel investor will just end up comparing your company to other deals they have seen and the growth/risk profile of those companies. Typical investments for angels have pre-money valuations between $1.5mm and $4mm and this has remained pretty consistent over the years. Valuation does end up being a negotiation, but don’t try to come into the meeting talking about DCF and public comps because it’s often less relevant for seed stage investing

-          Remember that angels are not necessarily investing in your product or your management team. They are investing in your company’s future cash flows.

 So before you get too caught up about making sure you have an amazing business plan or marketing materials, aim to have a minimum viable product that proves your idea or product is the most important product/service for a specific customer.

Also, remember that angel investing should be a two-way street. You should be doing your own due diligence on your potential investors just as much as they are doing their diligence on you and your company. The benefits of accessing experienced angel investors is that you’ll have smart money backing you and you’ll have access to a much larger investor network.

Current Angel Investing Landscape

The current early stage funding landscape is much more competitive than it has been in the past. These days there are now more startups, but less money available and a lot of seed capital has started to drift towards larger deals. Since the credit markets dried up over the past two years, small business lending has significantly declined each year since 2008.

Investing in early-stage companies has generally favored later stage companies. The Chicago early-stage investing community is still relatively young. This is because over 70% of VC’s invest in MA and CA and in 2010 only 7% of venture capital has been invested in the Midwest.

There are currently around 330 angel groups in the U.S. and Canada and approximately 260,000 active angels. In the last year, there was over $20bn invested by angels in 61,900 companies with an average angel deal size of $300,000 (although it can vary from $10,000-$2mm). The interesting fact is that VC’s have invested approximately the same aggregate amount ($23 billion), but in a smaller number of deals (1,012 companies for an average of $22mm per company).

The angel investing landscape has gotten tougher, but I’m going to provide some advice in the next two posts about how to best position your company to successfully receive angel funding.

Who are angel investors?

An interesting fact that I recently discovered is that the term angel investor actually came about through those individuals who first helped fund and invest in plays on Broadway, who were then called “angels.”

I like to define angel investors as both mentors and advisors to early-stage companies. They are often successful executives, experienced entrepreneurs, and high net-worth individuals (defined by the SEC as accredited investors with annual incomes over $200,000). Angels have a passion for early-staged ventures and often want to be engaged and involved with the companies whenever they can. When they listen to pitches or meet new startups they are usually constantly thinking about how they can help make the company better.

When looking for angel investors, aim to find those who have a strong expertise in your industry, who are passionate, who are willing to mentor you and your company, and who have a large extended network of other angels or connections with the VC community.

Angels like to typically invest within an organized group. Angel groups often have around 20 members and meet every month or so to listen to pitches from entrepreneurs for the opportunity to decide whether or not they would be willing to invest in the company. The whole angel investing process can typically take 3 months from the initial contact with the company since there is a pre-screening, screening process, investment committee meeting, diligence and then the structuring of the deal. Most angel groups will aim to wrap up a deal eight weeks after agreeing to invest at their investment committee. Some angel groups may also have presenting fees, which can vary from a few hundred dollars to thousands of dollars. The groups charge fees either to help manage overhead costs or to make sure that the entrepreneurs presenting are serious about raising angel capital.

Angel Investing – The Inside Scoop

This past week, I attended another EFactor event that consisted of two keynote speakers who talked about angel investing and then it was followed by a panel discussion with five angel investors from all the major angel groups in Chicago. For the next few posts, I’m going to recap what I learned from the event and focus on what it means to be an angel investor, what the current angel funding landscape is like and what angel investors are typically looking for when deciding whether to make an investment.
Also, a good article about how to pitch to angel investors was published in the WSJ a few days ago that I would recommend reading especially if you are looking to reach out to angels for funding anytime soon – Chasing the New Angel Investors.

I also really enjoyed Joanne Wilson’s perspective on angels investing in women-led businesses in a recent Q&A.  When asked to provide advice for angels or VCs looking to invest in women-driven startups she said, “There are meetups all over the city every single night. Eventually, you meet people and hear what's going on. It's a very open, embracing industry. There's a lot out there and there are a lot of bloggers writing about what's going on and about new businesses. If you can't find women-led businesses, then you're not reading the right things and you're not looking in the right spots. I would love to see more people who have created wealth for themselves and their families take a chunk of their change and invest in women-led companies. It would be better for the economy. And, again, better for women. By the way, it's not always about women — companies should be mixed. Women bring something to the table and so do men. It's about the best ideas.”

I completely agree with Joanne Wilson (who by the way is the wife of VC Fred Wilson) and I’ve found the entrepreneurship community here in Chicago very welcoming and easy to get involved in through meetup groups, networking, and helpful seminars.

Making Your Pitch

Before you even get started with fundraising for your business, be sure to have survival plans at all stages in case things are not going well (i.e. a Plan A, B & C). Think about what you will do in the event things don’t happen the way you would expect – are there any other ways you will be able to get out of the business or people you can sell to in case things go terribly wrong?

You should also start thinking of talking to angel investors, as soon as you have “proof of concept.” This means that you should aim to have customers by the time you start approaching angels and hopefully you will even have examples of repeat customers who have great things to say about your product.

When making your pitch or sending materials to angel investors, a nice added bonus that can really help your chances is to include in your Appendix of materials, an email from a customer about your product (i.e. a “love letter”).

Keep in mind that most companies that successfully receive funding from angel investors typically have at least six months of a proven track record that someone will buy their product.

After sending over a teaser or executive summary, some angels will ask for either a business plan or give you an opportunity to pitch the business to them. You will often be given an hour, but try to have no more than 10 slides with crisp, clean bullets.

Be sure to practice your pitch several times in front of people who will tell you the truth. You have to be confident and believe in what you are doing or else investors will sense that you’re being tentative. Aim for confidence, not arrogance, and be sure to look and sound upbeat and excited.

In the first three to five minutes of your pitch, you really have to get to their emotions and get them hooked quickly. Show and tell them that your idea is a disruptive technology that will bring substantial returns for equity investors. Basically, have the first few minutes be a brief summary of the whole presentation, similar to an elevator pitch.

If you go past 30 minutes on just the PowerPoint, your presentation is probably too long because you need to leave enough time to answer all of their questions.  At the end of the presentation, in order to make sure you’re not wasting any more of your time or their time, I would recommend that before you leave, you should ask, “If we can produce what we are saying in this presentation, does this fit your investment criteria?”

Don’t forget to follow-up that evening with a quick email or message saying something along the lines of, “Thank you for your time today. We obviously strongly believe in this idea and would love to have you as an investor with us.”

How to Fund Your Idea – Part 2

The different types of funding can consist of yourself (both your savings and IRA), your friends & family, angel investors, strategic investors, private equity/VC funding, and going public.

Most people don’t realize that if you really need the financing, you can also invest your 401-k in yourself or your business with a self-directed account without having to pay a penalty. I view this as more of a back-up plan option if all your other options don’t seem to be working and you think you might not even make it to retirement if you don’t do something now to save your business.

Angel investors have typically made their own money in their own businesses and have a desire to transfer that knowledge to other businesses. Keep in mind that angel investors typically like to run together, so if you’ve found one angel, you’re likely to get seven or eight that would like to tag along with them and each one will invest anywhere from $25,000 to $250,000 each.

Strategic investors are people or companies that will receive a benefit from your business more than just their investment. For example, both your suppliers and your customers would be considered strategic investors. If you’re looking to potentially do an M&A deal, you will most likely be selling to a strategic investor, and so if they’ve invested in you, then they will be more likely to acquire you down the road. The reason most strategic investors will consider acquiring you is because you’re also selling to their competitors and they want to control your product/service in order to get a leg up.

Private equity and venture capitalists look for companies that will really make it big and then they help those companies either go public or sell to a strategic or other financial investor later on. They typically expect to get 3x-10x their money back in a five year period and they often expect only one out of five of their investments to really be a home run. Keep in mind that both the private equity and VC industries tend to be a very closed loop of people and they will often be very vocal about your business and ask for board seats.

Going public is often the ultimate goal for most companies, but it’s actually like creating a second business because there is a lot of added effort going into the process including government reporting, reports to shareholders, reporting to the markets, etc. However, it remains one of the best ways to raise big chunks of money and exit out of your investment.  It can be a very expensive and long process though (expect it to last at least 6 months and cost more than $100,000).

Another option to consider would be a reverse merger, where you would team up with a company that has been public a long time, but the business has been shut down, and it has decided to still keep the filing process going. In a reverse merger, one company acts as the shell corporation and your company aims to absorb the shell and reverse the name of the company (i.e. it’s a “reverse” merger because your company takes over the business and name). The reason most companies might not operate anymore but continue to file is because they know that the shell has value and it’s beneficial to other companies because it saves time and money when doing an IPO.