Entrepeneurial Services - Raising Capital

At this point, you have an idea or you have already started your company. To move things forward, you have realized that you need equity (risk) capital to finish your development, build your team, mass produce your product or launch a marketing campaign.

Who can you turn to? The scenery is a bit confusing at times.

While in the beginning, friends and family and your credit cards are likely to be your first investors, you will need to turn to outside funding. Few venture capitalists invest in very early stage companies as these seed deals often are companies still being formed. Many angels will mentor these entrepreneurs before they decide to invest in their company and can assist in the shaping of the new company.

Some angels invest in pre-revenue companies, yet prefer to work with seed fund deals when the product or service has been established. A few banks and venture capital funds specialize in seed and early stage deals, yet these are limited and the firms are very particular about their investment risk exposure.

To fill the gap between seed and early stage funding, some venture capitalists also act as angels when a deal does not fit their institutional fund criteria. It is a way for them to support a deal that they believe will be a success even though the company may be pre-revenue. Some angels also have investments in VC funds. Those typically have a higher starting level in the amount of money they will lend, but are also often more conservative in their lending habits.

How do you determine who is doing what and what amount of money can be invested by the angels?

In all reality, there are no hard facts as to the amount of money that is invested by angels.

• Angel investors invest more than the VC community. The VC community has an association with a structure and it is not difficult to find out how much money is being invested and in what sectors and who does what.
• There are more than 300 angel groups in the USA alone. Some are formally constituted e.g. The InvestIN Forum, some are very informal e.g. six buddies getting together once a month to look over deals.
• Angels are individuals and do not have to tell anyone what they do or invest in. There is a professional angel association – the Angel Capital Association who does provide some industry statistics. In 2004, it is reported that angels invested $24 billion in early stage deals.
• Angels tend to invest in deals that are close to home (e.g. within a three hour drive). However, with the existence of angel networks, coupled with the improvement in online communications, this "localization" is less prevalent than before.
• When working in groups, angels tend to invest more wisely and more often. Deals tend to get done if there is a lead angel is conducting due diligence. The lead will often inspire and motivate the other investors towards a closing.
• If a deal has been led by an acknowledged and experienced angel and that individual takes a position on the board of directors, this raises the comfort level of other investors and some angels will invest outside of their area (long distance). This same situation applies to angels who do not have experience in the entrepreneurs' field (technical, medical, life sciences or service organization, etc.). When a recognized investor is involved, other angels will join the deal.
• It is more efficient for an entrepreneur to present his/her deal to a group of angels rather than try to find them and pick them off one at a time.
• Angels like deals that are well prepared and where the presenter makes a clear cohesive pitch. Make sure you present an easy to understand value proposition for the business and a clear value proposition for the investor. Angels invest mostly in the early stage or series A round. Many angels will only invest in the round if the amount being raised will take the company to cash flow break even. Angels are normally very busy people. If an angel champions your deal, you may get referrals to other individual angels, other forums of angels or other institutions of equity lending.

Attitude is very important. You are raising money for your business venture. We understand that this is an exciting time for any entrepreneur. If you are an exciting personality, then present your deal yourself. If you are not, then either find a coach or ask a colleague (marketing type) to pitch the deal when presenting at an angel forum. The founder/entrepreneur should always be present and be ready to answer any questions.

Read the books on the Recommended reading list. The book Attracting Capital from Angels is particularly good.

Contact local angel groups/forums and ask if they allow entrepreneur as guests. DO NOT hit on the members when you are a guest.

Learn how to pitch your deal. Talk to mentors and coaches and become at ease with your presentation.

Go pitch your deal and be open to suggestions.

Pitch to as many groups as you can. When you get traction, go back to the ones where you did not get any response and tell them that you are getting support elsewhere. This may be the “confidence kicker” that gets them to take a second look.