Taking a high-potential start-up to the next level
Angels are investors who finance start-ups after the entrepreneurs have put up their own capital and raised additional funding from so-called friends & family. Angels only invest in new businesses which they believe can return big numbers. They know their investments are going to fail most of the time, and some angels actually say they are in it less for the money than for the excitement of a hit.
To attract an angel, an entrepreneur has to have an idea that will fill a gap in what promises to be an enormous market. Some angels also require that the entrepreneur be truly passionate about the idea — in fact, consumed by it – before they would even consider making an investment. Others look only for entrepreneurs who’ve excelled at everything they’ve ever done, whether at school, sports, work or prior business ventures.
Execution is the name of the game
All angels expect entrepreneurs to have done their homework and know everything there is to know about their ideas — the technology, the market, the competition, the risks and the sales strategy. They also test to see whether the entrepreneur is the type of person who could “pivot” if and when changes are warranted in the business model for the new idea.
For angels, the key to start-up success is execution. Angels have to believe that the person they invest in has more than just an inspired idea, but also the capacity to bring it to fruition. Start-ups are hard work and entrepreneurs inevitably undergo ups and downs. Angels believe that entrepreneurs can cope better with these vicissitudes by associating early on with other entrepreneurs and learning from their experiences as well as their own. They therefore tend to look kindly on entrepreneurs who’ve benefited from organized incubation or acceleration programs.
Angels are generally only available to entrepreneurs through personal connections. They get hundreds if not thousands of pitches tossed at them from various sources every year and invest in only a tiny fraction. Because they see so many start-up propositions, though, angels have no patience for clichéd presentations that don’t sound fresh and original. They only want to do business with the best and the brightest.
Forget about protecting your idea
Before an entrepreneur should even approach an angel, he or she should have done everything humanly possible on behalf of his or her business idea while waiting to raise outside capital to commercialize it. Angels definitely want to see total commitment from their investees.
Furthermore, angels will simply not take the risk of foreclosing themselves from exploiting better ideas from other sources because of restrictions in an entrepreneur’s NDA.
Entrepreneurs should relinquish any notion that their business ideas are too precious to share in detail with an angel. Angels expect to hear everything they want to know about the idea and will not sign any non-disclosure (confidentiality) agreement beforehand. If an entrepreneur is determined to protect his or her idea from theft, he or she should patent it if possible. Angels take the view that they have more important things to do than steal someone else’s idea and, as mentioned above, put the highest premium on an entrepreneur’s ability to execute. Furthermore, angels will simply not take the risk of foreclosing themselves from exploiting better ideas from other sources because of restrictions in an entrepreneur’s NDA.
Angels are open-minded, not trend followers
If an entrepreneur does get a meeting with an angel and nothing comes of it, he or she should not automatically assume that the angel would never be interested in his/her idea, no matter what. One way to possibly reverse an earlier rejection is to tell the angel, on your way out the door, what business milestones you intend to achieve, say, in the next six months. Then, when you achieve them, try to get back on the angel’s calendar. You may get lucky.
Although the term has become a virtual meme among start-ups, an entrepreneur need not necessarily come up with an idea that is “disruptive” of an industry or market. Angels pride themselves on being open to any unique business proposition, so long as its potential market is huge. They don’t only look at hot sectors or follow trends.
If an entrepreneur is fortunate enough to procure an angel investment, he or she must then be prepared for the angel to become actively involved in the business. The angel has placed a big bet on the entrepreneur (with its own money) and wants to do everything possible to promote the success and control the risks of its investment. Successful angels put a lot of energy into the businesses they finance and intend to serve as mentors and strategic partners to the entrepreneurs they cultivate.
One way or the other, angels expect to be out of their investments in no more than five-to-seven years (some would say three). More than half of those investments will fail well before that. A successful, angel-funded start-up is one that is sold – either to a larger company or in an IPO — at a multiple of at least 3x and, ideally, in the range of 20-30x. Many angels are former serial entrepreneurs who have hit ‘home runs’ in the past and who, as a result, view angel investing as a way to give back to the innovation ecosystem the early-stage financial support and encouragement it once gave them.