If you’re currently bootstrapped with a viable prototype, maybe with some money from friends and family, finding an angel investor to go to market or launch a beta may be your next step.
An angel investor is an individual that formerly experienced a liquidity event and is re-investing back in the startup community. Their investments generally range between $25,000-$100,000. Similar to early-stage venture capitalists, angel investors hope to see a return on their money in about three to five years.
“Some of us do it because we’ve done it so long that we’re comfortable in the space and some of us do it because it’s a fantastic way to give back to the ecosystem,” says Howard Lubert, area president of the world’s largest investment group Keiretsu Forum‘s South-East and Mid-Atlantic regions. “Angel investors come in all shapes and sizes, often with specific inclinations toward industries they want to invest in.”
Lubert provides insights into what startup founders should look out for when reaching out to an angel investor — and the one thing to beware of.
There are two types of angel investors
Angels are usually one of two things, according to Lubert. One, they come from a space where they are a noted expert; for example, if they had a software business, they may look for a similar business to invest in. They’re able to assess the potential of the company because of their expertise.
Or second, they make individual investments in spaces where they are not an expert in by being part of a larger group. “Groups of angel investors take advantage of the expertise of many people to help minimize risk as much as possible. Potential return on investment is substantially higher, according to studies,” says Lubert.
Do your homework on preferred investors
Do targeted research about angel groups in your geographical space, as well as their specific industry. Understand what it is those individuals or groups invest in (industries), what type of teams they like to work with (look at the list of current investment companies) and how they invest (requirements and stage of business).
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“For example, the Keiretsu Forum group is not an early seed-stage investment group. We’re a later-stage group that invests in A and B round deals and almost never invest in convertible notes, only in equity. We’re looking for companies that are ready to transition from R&D to sales and marketing.”
Be careful with convertible notes
Convertible notes at the seed stage are usually done if the startup founder wishes to delay establishing a valuation until the next milestone. If successful, they will convert into equity. Lubert shares that founders should beware, as the seed investor has the right to ask for his/her money back versus converting into equity.
This may backfire, as new investors may not want to pay for “sins of the past” if their money is going to pay off previous investors instead of fueling the company’s growth.
Skip the secret sauce
Often entrepreneurs focus too much on the “secret sauce” or “cool factor” of the company during the pitch. Lubert shares that angel investors, especially at the seed stage, are more concerned with the current structure of the startup versus what makes it cool. He suggests walking into the meeting with four main things highlighted in the pitch — people (how good your team is), business plan (how do you plan to scale the product), technology (what are you disrupting/solving with this), and the marketplace (where are your customers and how do you plan to reach them).
Build a solid term sheet
“My philosophy of term sheets is that it is the most important marketing document a company will ever issue. It must get potential investors excited about the company and the ROI opportunity as spelled out in the term sheet,” says Lubert. He suggests having the angel investor go over the term sheet with you to make sure you’re on the same page. Then, once you have a term sheet in hand, shop around for more funding if needed.
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