This summer, I had the pleasure to be a mentor at the Entrepreneurship Summer School, an elective at London Business School (my alma mater) where students are tasked with testing whether their startup ideas can turn into a fundable business over the course of three months. I could write a whole post on the 7-D model students follow (and I probably will) but I’d like to focus on a lecture at the end of the course, by a UK-based angel investor, who provided tips for entrepreneurs to make their company attractive for an angel. I’ve decided to keep his name off as I didn’t get his explicit permission, but drop me a line if you’d like to get in touch. Luckily, a lot of the material overlapped with my presentation from last year on “how to make your startup attractive for investors“. Check out the tips for raising funding from angels after the jump.
10 tips for raising money from business angels
- Add a “Driver page” to your Excel – a driver page is the first tab of your worksheet where you include all the variables of your model, and have all the formulas tie into that page. This will enable you and the angel to run different financial scenarios in a very quick and convenient way.
- Have an upfront proposition – how much money are you raising? How many angels have committed so far?
- Make sure your model is credible – “the market in China is 3 billion users and we will aim to achieve 1% market penetration in year one” (yeah, right). Bottom up is better than top down projections (i.e. how do you get your first 1000, 10000 and 100,000 users? Are your costs per acquisition going up or down with scale?
- Have a sigle main idea. Sure, this can be limiting and you don’t want to be too narrow. But angels are looking for a simple, executable, original, defensible, scalable, credible business idea – sounds easy, no?
- Evidence the plan will work – for example, there’s a similar startup in another country that’s working well. But here it’s not enough to relay on secondary research – get out there and speak to potential customers, partners and even competitors – gather evidence and interest.
- Management team that sounds and looks like they can execute the plan – if you didn’t finish building the team yet, make sure you have at least one co-founder with complementary skills. A startup is a lot of work, and one person will have a hard time executing on all the different tasks ahead. Big company experience is a big plus for angels.
- Commitment: both in time and money – angels are putting their private money at risk in return for your time and creativity, so they expect you to be fully committed to the idea. Didn’t quit your day job yet? It’s probably not going to cut it. Angels want to feel as if you’re going to do this thing anyway, even if they don’t write the check. And in case it fails, they want you to hurt too. The amount doesn’t matter so much, but this particular angel mentioned that he would find out how much you made in your last job, and would want you to personally invest a significant amount in the business.
- The angel likes to feel as if he’s the last missing ingredient. Most angels would prefer to join to the round last, as other people have been convinced already. They like to feel like the enabler, not the first ones to get in.
- Be personal – angels like flattery, like everyone else. Do your research on the angel and explain why you want him/her specifically. What experience or contacts are they bringing to the table? Are you offering them a board seat or a chairman role?
- Deal structure – I could write a full post just on this, but some aspects that were brought up are the need to agree on a reasonable valuation, what investment vehicles are used (convertible debt vs stock, options and warrants and other non-dilutive mechanisms). The angel will probably not agree to own less than 10%, as they want to have the ability to call an urgent board meeting in case you steer off the plan.
- Bonus point – be honest and don’t lie, at any point in the process. For example, if one of the co-founders is thinking about quitting and getting a job, you better raise the point before you get the check – trust is very important in the fundraising process and the angel wants to know your incentives are aligned. The moment you’re caught in a lie, even the slightest one, the angel will wonder what else you didn’t tell them, and the chance you’ll succeed in raising funding from them or their network is slim.