• How-to

Attracting angel investment is still quite a challenge in India. It is an informal set up and, more often than not, operates through word-of-mouth. Currently, there are only a handful of serious angel investors actively involved with entrepreneurs. Anything that is formal or organized has moved away from early-stage funding. Here are a few tips to help you woo angel investors, regardless of the set up.

Friends & Family First
Charity begins at home, and so does angel investing. This is a very critical step forward. Start the process by spreading the word within your own network of friends and family. If you can’t convince your family to invest in your business, you might find it difficult to convince an angel as well. Of course, this also depends on the availability of resources among your friends and family.

Finding the One
Before you go hunting for funds, figure out whether you want an active or a passive angel. If you just want money, then finding an angel with the same passion as yours is important. On the other hand, if you are looking for an active angel, think about what you need besides money. Do you want an angel who can help you take your business to the next level? If that’s the case, identify the industry you want people from.

The investment profile of an angel investor is equally important to know. Also, it is important to know what kind of expertise, knowledge and contacts the angel can bring to the table. So, typically, if you want an angel for few years, you should know if he / she has helped previous startups raise more capital during his / her tenure. Remember, an angel is someone who can stay with your enterprise for a long time and open new doors from a customer’s perspective.

What’s Your Story?
Angels invest in entrepreneurs, VCs in businesses. You’re at a stage where your business idea, which you believe is a scaleable model, needs capital infusion. So, state your expectations upfront, think through your plans well and look at money that will last you at least 1-2 years. The first two things an angel wants to see is: 1) What is the business idea? 2) What problem is the entrepreneur is trying to solve? Research the market and understand your strengths and the competition. Angels need to understand the market. And size matters.

Also, what’s your skin in the game? Who are your customers? What is your value proposition? Angels want to know how well you know your own business, as they like to fund a proof of concept. However, this is not to say that going with just an idea on paper is a bad thing—as long as you focus on the vision.

Execution is another key factor. An angel needs to like you. Your passion and experience should come through. Make it short, crisp, powerful. The typical elevator pitch works here. Have all versions ready: under a minute, within 10 minutes, and about an hour long. Usually, an angel knows within the first ten minutes of your presentation whether he / she will fund you.

Why Me?
You’re wooing angels for money. Take them seriously. Be clear why you need their money. Is it for working capital? Infrastructure? An angel needs to know that his/her money has maximum leverage in terms of use of funds. If the entrepreneur is iffy, he/she will think again.

More importantly, your angel investor will want to know, at some point, how you’ll survive two years without a salary. Now here’s the crucial bit. Never tell an angel that you intend to use their money to pay yourself a salary. As an entrepreneur, you should make sure you have the ability to last till revenues flow in, and be willing to take your salary from there. This shows that you’re willing to take a risk, too. Your issues should be proactive; if you are reactive based on the questions an angel asks, it tells them you’re just taking a chance.

Show Me the Money!
An angel wants to see your sense for numbers. How focused are you on generating revenues and making the company sustainable. Why are you the right person to do it? Angels will do a quick back of the envelope calculation to see if your numbers are realistic. Entrepreneurs usually underestimate costs. A basic thumb rule: put realistic costs and keep revenues conservative. Don’t put random numbers; think through every projection.

Who Else Can Play Your Game?
Don’t think you’re the only one. Many a time entrepreneurs get caught up in their own ventures, so much so that they forget about a discount analysis of other players showing up. Can your model survive amidst competition? Have you done a scenario analysis? What is your sensitivity analysis if things go wrong? Don’t forget what others can do.

When Can I Leave?
Angel needs a return on investment. It’s inherently a riskier business than VCs, because it is so early in the game. Therefore, what is the exit possibility? How long will the money last? A VC (or any other investor) could come in and buy your angel out. Or, you can have an M&A or an IPO at early stage, too. A big reason why VCs come in and buy angels out is to avoid conflict. However, when you pitch, you must think of a valuation and reason for valuation. Two common structures for this are:

* Discounting to the VC’s investment as an annualized discount of 2-3 percent.
* Future of revenues; see what multiple of revenues an angel’s stake will be. This is tied to future performance.

Remember, a VC’s milestone is different than an angel’s in the quantum of funding. It is expensive money that takes the business to a certain stage. Unless people see an exit possibility, they won’t come easily.

Team Time
Don’t leave your core team members out! Introduce your core team and pitch with them. This should ideally happen at the second meeting. Team dynamics should be strong. This is very important for an angel, too. Don’t speak for them, though; they should be able to hold their own. Judging a team is a very instinctive process for an angel—if your team isn’t reliable, it’s going to show.

Also, angels will look at the value of your team. Therefore, the prior work experience of your team members is important. Does your team complement the front and back ends of your business?

In case they don’t cut the mustard, your potential angel investor may ask you to find someone else and come back. Your own experience is as important, as angels always evaluate the track record of entrepreneur. What was your work experience like at your previous jobs? For example, if you were a marketing manager, how successful were you? If they get a sense that you lack adequate knowledge in an area, angels will reject you.

Follow Me
Entrepreneurs often make the mistake of pitching and going silent. Instead, follow through with your angel. Remember, angels usually have more important commitments, so it is your duty to keep them engaged and ensure closure. On the other hand, don’t be a nag. Make your own judgment call on how much you should follow up.

For best results, don’t…
* Say you’ll do everything for everybody. You should know what your product can and cannot do.
* Be eager to please.
* Be unclear on the direction and intention. You should articulate pain areas of your business.
* Try and outwit the angel or act oversmart.
* Hide your risks.
* Stay with your rehearsed pitch (instead, be engaged and go with angel’s flow of dialogue).
* Try and be a mastermind.
* Talk about or name other angels you’ve spoken to.
* Oversell.
* Overstate income and understate costs.
* Speak for your core team members.
* Take names of other angels you’ve pitched to (unless the other guy has given permission).

©Entrepreneur April 2010

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