In the previous 3 sections of this post we have looked at raising capital in the forms of self financing, friends and family, borrowing it and crowd funding. Today we concentrate on the last two, angel investors and venture capitalist.
If you are unable to raise capital in the previous formats, angel investors become your next best option. Yet, it is not without issues. As we move down the list, the complexity level and cost associated with raising capital increase substantially. While in the majority of the cases you would be able to have a brief conversation with your friends and family in order to raise capital (at a reasonable cost) such an approach would not work with angel investors or venture capitalists.
Before we get any further, lets define who Angel Investors are, how to find them and what they are looking for.
Who Are Angel Investors?
They are defined as affluent individual who provides capital for a business start up, usually in exchange for convertible debt or ownership equity. They can be anyone, but in the majority of cases they are high net worth individuals who have $1 Million or more in liquid investable assets. Some of these individuals advertise themselves as Angel Investors while others do not. Technically speaking, if you have a rich uncle with over $1 million in investable assets, he could be classified as an Angel Investor.
Where Do I Find Them?
There are 3 different ways.
- Look For Angel Investor Groups In Your City. Angel Investor groups or organizations are popular hangouts for Angel Investors in any given areas. They tend to pull their resources together in order to look for startup companies that match their requirements. They often have meetings and set up presentations/pitches for entrepreneurs and startups alike. Some of them make capital allocation decisions based on a group decision while others do it on individual basis. Either way, there should be at least a few of such organizations in your city and I highly encourage you to look them up.
- Online: There are a number of websites out there that cater to bringing Angel Investors and Entrepreneurs together. Gust.com and angel.co are good places to start, but there are many others. These sites do their best to connect companies to capital, but it is not as easy as it sounds. A substantial amount of work on your part is still required.
- High Net Worth Individual List: There are many such lists out there, but I highly recommend going to Infousa.com and using their filters to get the freshest possible data. Ask for people in your area with net worth of over $1 Million and then contact them on individual basis to see if they would be interested in investing in your venture. It is legal now.
What Are They Looking For?
For many angle investors the interest is twofold. First, they would like to make outsized returns while participating in an exciting startup. Yet, for many it is much more than that. Many Angel Investors are interested in participating and mentoring entrepreneurs. Some are trying to relive their glory days through the companies they invest in. Whatever their situation is, most Angel Investors approach this in a very serious fashion. As such, do not approach Angle Investors unless and until you are ready.
What does being ready mean?
First, you should already have something build. While having a finished product is your best bet, a prototype or a beta type of a situation might work as well. Very few angel investors or venture capitalist will invest in an idea. In fact, I have never seen it happen personally (although I have heard about it).
Second, have a detailed business plan written out. While I am not a big believer of following pre set business plans (often you have to change direction), it is a must have to show potential investors. You must illustrate that you know what you are talking about, your market forces and financials. Without it no Angel Investor is going to be able to properly evaluate the legitimacy of your investment opportunity.
The threshold is very easy and straight forward here. If you cannot put a legitimate business plan together, how are you supposed to run a business? If you cannot, you have no business approaching Angel Investors or Venture Capitalists. Do not waste your time, you will not get anywhere.
Everything that I have mentioned in regards to Angel Investors applies towards Venture Capitalist, but on a bigger scale. That means more expansive capital, higher threshold requirements and for the most part a bigger capital investments.
The keyword for Venture Capitalist is TRACTION.
If you are starting out with an idea, I wouldn’t even bother approaching venture capitalist. You are not ready and they are not interested. Think of venture capital as growth capital. For the most part Venture Capitalist are seeking out growth concepts that are already getting customer traction. Anything less than that would not be of interest to them.
If you still decide to approach venture capitalist the best way to do it is through your network or their existing portfolio companies. An introduction is always the best possible way, but not an option for many. I would strongly caution you against a shotgun contact approach here. You would be much better served researching any given Venture Capitalist for some time and coming up with a unique proposition of why they should listen to you. This will guarantee a much better success rate. Finding them should be relatively easy as multiple lists are available online.
Personally, I have mixed fillings about venture capitalist. They are wonderful and very smart people. Yet, they are under constant pressure from their own investors to hit their next home run or to earn a significant positive return. As such, their interests are not necessarily aligned with yours. It is their job to make as much money as possible and they will do whatever is necessary to get that done. Sometimes that includes destroying companies they have invested in or replacing you as the CEO. Be aware of it, but don’t blame them. That is how the game is played.
That about covers it. Should you have any questions, please don’t hesitate to contact me.
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