April 26, 2019
So, you’re nearly there with your new product or you’re planning on ramping things up and you’re on the hunt for capital to realise your vision. You’ve created a pitch deck, spent some time working up a credible spreadsheet model and started to let a few close people know that you’re about to start raising a round. Wonderful.
In addition to a list of venture capital firms you may have shortlisted you’re also approaching private angel investors, most likely it is these individuals that will form the foundation of your capital resourcing. For the vast majority of companies the first few rounds will be funded by angels, it is an intensely emotional, personal and human process, we know we’ve been there and got the branded t-shirt!
Angel investors, especially at the early stage are not VCs, they are investing their own money and making decisions largely alone. Their motivations and expectations are not in-line with a VC and so from the outset you need to tailor your approach accordingly.
Friends and Family
Many founders utilise their close personal network to secure their first outside investment. Whilst there is a massive divergence in an individual’s ability to do this the sensitivities remain the same irrespective of your background. Absolute honesty and full transparency here is key.
Being upfront around the risk associated and the challenges that you’ll face will make it easier to look people in the eye if things don’t work out. For some the feeling of obligation and the encroachment into their personal lives makes the prospect of raising capital from friends and family overbearing.
If you do raise from people that know you personally then don’t take more capital than you feel they can afford to lose, don’t sell too much sizzle and be honest about anything else in your life that you feel you should disclose. In short make sure you can sleep at night.
There are a large number of angel networks out there; some are small and specific, more akin to a syndicate, some are large and broad ranging. Almost all will charge a fee, either upfront or as a percentage of the funds raised. As in most areas of life you get what you pay for, good networks that have high levels of engagement, good processes and a clear fee structure should be well considered.
Upfront fees can seem scary to an early stage company with a limited budget. There is also perhaps some stigma around having to pay for fundraising when there is so much coverage of the ‘super star’ founders that have VCs fighting to get to them.
The reality is that very few companies are in this position and acting as if you are is only going to alienate potential investment partners and slow down your fundraise. The best angel networks have spent a lot of time building rapport and trust with their members, they understand their investment motivations and preferences. Although it may seem like they are being paid to simply forward on a deck there is more to it than meets the eye. Leveraging angel networks effectively will be easier if you consider the model of the network and don’t see it simply as a mailing list.
Direct to Angels
This is going to be the most common route, you’ll have compiled a list which you add to as and when an idea, article or conversations prompts it. When approaching somebody you don’t know for investment there are a handful of tips that I would suggest, this is not an exhaustive list but it will help you to focus your thinking:
Make it personal, let the individual know why you’ve singled them out.
Utilise the subject line of an email well.
Be concise, communicate the essence of and the investment ask clearly.
Be specific on what the next action will be.
Don’t be overconfident or fabricate too bullish a situation, some entrepreneurial licence is fine but don’t overdo it.
Request candour and a quick response if it’s a pass to help you get clarity as you build your book.
Don’t burn bridges, keep a note of people who you may want to work with further down the line.
Treat it like a sales exercise with a deadline, maintain momentum and stay focussed.
Respond immediately, as much as mindfulness and taking care of mental health is important a potential investor wants to see you’ll go above and beyond the rest.
Angel investors are driven by a range of motivations which include financial return, mental stimulation, philanthropy, tax mitigation, quasi consultant/investor roles, kudos, peer pressure and many more.
You are likely to be in a commercial relationship with investors from your first few rounds for years so think carefully about personalities, drivers and how you’d feel about having to deliver bad news to them.
Trust your gut and seek out those who value your time and entrepreneurial energy.