10 Tips for Entrepreneurs Seeking Angel Capital

By Jim Roberts, special to WRAL LTW

CHAPEL HILL – So how should an entrepreneur go about winning investors? Here are my 10 recommendations – plus a bonus.

1. Get to know the investors before you need the money. This is a common piece of advice even if you are looking for a bank loan for your home. The more rapport you have with the people you need money from, the easier and less time it will take to get the transaction done. Start getting to know the investors even before you leave your job to start the company.

2. Balance your appeal to the investor’s greed by also addressing their fear. This is not a popular piece of advice because some people believe you only to address the upside of a deal, but I think it is very valid. I once had an investor tell me “I invest when I find I can’t say no.” Well people are saying no because the risks outweigh the reward and obviously the risks have not been addressed enough to make the investor comfortable. Address the fear the investor has if the market situation changes. Will your business be able to adjust and how? (The how is addressed by having a great management team lined up that could take the company in a new direction within the industry.)

3. Be ready to negotiate terms. The investor may want a higher percentage. In a variety of situations, entrepreneurs are afraid the investors require too much equity to make the deal happen. The old saying goes “Do you want to own 100% of a tiny company or do you want to own 5% of a company the size of Microsoft?” Owning a small piece of a larger company is a much better deal. Be flexible but also make sure you own enough of the company to make it worth your while. If you own too small a percentage, you may feel like this is more of a job versus a chance to be a part of something big.

4. Do your due diligence on the angel investor. They will look into your background. It is a safe bet that a good investor is going to call around town asking other business people about you and your company. They are going to Google search your company on the Internet. They are going to do deep research on your company. Well you need to do the same with the people who might end up owning a piece of your company. Call around to your peer entrepreneurs who this angel investor has worked with in the past.

5. Deal with accredited angels to avoid the 2 AM phone calls. This is a tough situation for inexperienced entrepreneurs. The inexperienced entrepreneur is so eager to find an investor that it is tempting to take the money from anyone willing to write the check. But the downside of taking money from inexperienced (or unsophisticated or unaccredited) angel investors is their lack of experience with the challenges of startup companies. No matter how many times you hear about startups, living the experience of struggling to make payroll or not receiving the client’s payment on schedule can cause some people to really struggle with the stress. If you deal with inexperienced angels, you may end up getting that 2 AM phone call about getting the money back or getting the return on investment. If you find yourself in this situation, you should give real consideration of actually returning the money if this is possible within the financial situation of the company. Experienced angels understand the risks and only invest “Mad money or Vegas money” that they can afford to lose.

6. Network with other experienced entrepreneurs to learn from success. There are many organizations for entrepreneurs and a variety of economic development organizations meant to help entrepreneurs succeed. Of course, the CED is the model of entrepreneur development and entrepreneur networks. Consider participating in the FastTrac program meant to take an entrepreneur from business plan to investor ready. Take a look at the SBTDC program called Are you Investor Ready? Attend conferences such as the SEVC, CED’s Venture 2008 in April or the InnoVenture Conference in Greenville, SC in March. These conferences allow you to see polished entrepreneurs who have been screened and qualified as an example of what your company needs to look like before you are ready to meet investors.

7. Register as a Qualified Business Venture to help with angel investor tax credits. North Carolina and Virginia have an investor tax credit for people who invest in companies below five million dollars in revenue. In North Carolina, this tax credit is called the Qualified Business Venture Tax Credit. The QBV is up to 25% of the investment made as a tax credit on North Carolina income tax. Your company must be registered with the state for your angel investors to receive the tax credit. While I would not say the investors get involved just for the tax credit, the QBV can help someone get off the fence if they are undecided.

8. Practice your pitch to perfection with board members or an advisory board. You MUST, MUST, MUST practice your pitch with people who are familiar with good presentations. Practicing with your wife, child or dog does not count. Someone with experience will give you the real feedback you will need to ensure your slides are appropriate and have the impact needed to impress an investor. Guy Kawasaki always says your slides should be 10-20-30. 10 slides, 20 minutes and in 30 font size. (Older investors may need the extra font size according to Kawasaki.)

9. Get lined up with the right professional service providers. Okay, I know he is cheap, but Uncle Joe, the real estate attorney is not the right lawyer to represent your best interests as a startup technology company. Take look at the sponsor pages of entrepreneur council networks and conference brochures for the professional service providers who are active in helping entrepreneurs. Ask around with other entrepreneurs of what legal and accounting firms took their companies to the next level. Chances are there is a firm in your area or within two hours of your office that has a successful track record. And there is even a better chance that these higher profile accounting and legal firms know the active angel investors in your area.

10. Know how the investors are potentially going to exit and make their money in multiples. At the end of the day, these investors want to make money if they are writing checks to own a piece of your company. Be prepared to tell them how they are going to get the money out of your company. Have a list of potential acquirers ready when the question is asked. Of course, the Initial Public Offering is a potential exit event but is becoming more rare as an acceptable answer when you are a true startup looking for angel money versus when looking for venture capital. Angel investors don’t want a quarterly dividend check. They want to make multiples on their money. If they write the minimal $25,000 check, they are hoping to make $250,000 within five to seven years. So your business

BONUS: Read Bill Warner’s pieces on Local Tech Wire. Sure this seems like a shameless plug for LTW and Bill Warner. But let me give you some insight. Our entrepreneur council paid Warner as a consultant to give one on one “tough love” investor presentation skills seminars to five entrepreneurs in the Asheville area. Within the next five months, these entrepreneurs raised $3.1 million dollars in funding in the Asheville area. This is quite an accomplishment in the mountains. Warner is an expert in knowing what investors are looking for because he is an investor and runs an investor group. He gives frequent expert advice in Local Tech Wire for free.

About the author: Jim Roberts was the former founding Executive Director of the Blue Ridge Entrepreneurial Council and the Blue Ridge Angel Investors Network. A new resident of the Triangle, he recently started a new blog about Leadership and Entrepreneurship. He can be reached at [email protected].

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6 Responses to “10 Tips for Entrepreneurs Seeking Angel Capital”

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