(What Angel Investors Look For?)

 

Definition of Angel Investors

 

Initially, the term ‘Angel Investor’ was used for those investors who helped the artists to stage their show at the Broadway, when their producers backed out at the last minute. In recent years, as more and more common people are setting out to become entrepreneurs, the significance of angel investors has intensified rapidly. Unlike venture capitalists, who pool other people’s money and invest it only in established enterprises that are capable of spinning huge profits, angel investors, on the other hand, invest their own money in companies that are still on papers or in the first and second stage of development.

 

It’s a myth that angel investors are super-rich people. In fact, most of the angel investors are either entrepreneurs or retired business executives with an annual income ranging between $50 000 to $100 000. For these people, angel investing is a part time job, which they undertake not only for monetary gains, but also to fulfill their desire to train the next generation of entrepreneurs. In addition to the adjoining vested interests, these individuals get current information about the various fields of business, which is quite beneficial for them with respect to expanding their reach as angel investors.   

 

It is usually, not easy to find capital for a company that is still in its early stages of development. While banks typically, demand an exorbitant interest rate as well as a few solid securities, venture capitalists normally, hesitate to invest an amount that is less than $1 million. In such a scenario, only three choices are left, your savings, funds from family and friends, and angel investors. From the first two options, you won’t be able to raise more than $200 000. Hence, the most feasible alternative appears to angel investors.

 

Classification of Angel Investors

 

Angel investors can be broadly segregated into two categories viz. allied and non-allied. An allied angel investor is one whom you know at a personal level, but he is not related to you in anyway, whilst a non-allied angel investor neither knows you nor your business. A sensible move would be to start with allied angel investors because they are not only familiar with you, but would also not hesitate to walk an extra mile to maintain the cordial relationship. People who come under the allied category of angel investors are as follows:

 

1. Professionals, whom you meet on daily basis like your doctor, lawyer, accountant, etc. These people frequently have discretionary income at their disposal, and it is by and large easier to convince them to invest their money in your business.
2. Business associates like your supplier, customers, employees, and even you competitors, who do not compete with you directly. You get to meet these people during the course of a normal business day, and they are usually ready to take risks.

 

If you are finding it difficult to retrieve funds from the angel investors belonging to the allied category, then you can safely opt for non-allied angel investors, which include:

 

1. Professionals, whom you don’t know personally.
2. Middle level managers in small and large business establishments.
3. Boutique investment bankers, who find angel investors for entrepreneurs.

 

You can also find angel investors of non-allied category through advertisements and in meetings of business associations and venture capital groups, or through business brokers. 

 

First Handshake with Angel Investor

 

As far as allied angel investor is concerned, you can safely come straight to the point at any time when you feel that the former is not engrossed in some important activities. However, with non-allied angel investor, unless you get a strong recommendation from a friend, you would have to build a good rapport with him first.

 

For the first few weeks, your angel investor would hang out with you to know more about you at the personal as well as business level. Don’t be surprised if you come to know that the investor was retrieving information about you behind your back. He may talk to your friend or family member, make a note of the kind of car you’re using, the make of clothes you’re wearing, and where you’re taking vacations.

 

The angel investor would be keenly interested in delving out as much information as possible about your expertise and management skills. After all, he would be giving out his hard-earned money to you, and he would certainly want it to be in safe hands. He may ask your business associates about you, and he may even be interested in meeting your management just to know the kind of people you have gathered around yourself and how they will help your company to grow.

 

Once, you succeed in building a good relationship with your non-allied angel investor, you can suggest a meeting. In the meeting, all you have to do is to put forth your business plan and your capital needs. Keep in mind that the process of extracting funds from an angel investor may take about 3 to 6 months to complete. Both you as well as your angel investor are engaged in different kinds of activities. While you are running your company as well as raising funds, your angel investor is looking after other business interests. Hence, coordinating and scheduling a meeting is unusually, difficult.

 

Questions that Angel Investors Frequently ask

 

On your first business meeting with the angel investor, you’ll be asked a lot of questions. Although it is difficult to say what kind of questions your angel investor would ask you, but there are some typical questions that every angel investor ask. These questions deal with the following issues:

 

• The size of your market and the extent of your penetration in the market.
• The products and services that you offer, and how effectively they fulfill the needs of your customers.
• The strengths and weaknesses of your competitors.
• The ability of your management team to take advantage of a situation.
• Last, but not the least, questions may be asked about your past activities and your resources.

 

Business Plan that would Impress the Angel Investors

 

Almost all the above questions can be answered via a business plan. In fact, the best way to win over the confidence of angel investor is, preparing an exceptionally good business plan and knowing it inside out. However, the biggest question that impinges the minds of most entrepreneurs is, “How to prepare a business plan?”

 

There are innumerable sites on the Internet where you can get various kinds of business plans. You can also hire a business consultant for this purpose. Nevertheless, despite of the availability of all types of support, it is always better to prepare the business plan on your own because it is you who would be presenting it before the angel investor, and if you prepare the plan on your own, you’ll obviously know it back to front.

 

The main ingredients of your business plan should be as follows:

 

1. Market Penetration- In this section of the business plan, basically, you would be demonstrating your power to penetrate into the market, and then expand. In order to determine your capacity, you would have to conduct a thorough market research. In you research, first you would have to identify your market, and thereafter ascertain its approximate size. Remember, your market size should be narrow enough, so that you can easily think of strategies to capture it, but at the same time it should be broad enough, so that you can retrieve profits from it.

 

The next step of your market research pertains to fieldwork, where you would have to meet your prospective customers fact-to-face. In this stage, you would determine the needs of your potential customers, how much they are willing to pay, in what way your product or service is benefiting them in terms of money and time, and how valuable do they consider your product or service. On the basis of your fieldwork, find out the percentage of your target market. Here target market refers of customers who are willing to buy your products or services.

 

Once, you have completed the market research, and ascertained the extent of your market penetration, double-check the number that denotes your market size. If you estimate your market size to be 125 million, then think again because that’s almost half the population of the U.S. It is an unrealistic figure because in the initial stages you certainly don’t have the capacity to cater such a large section of people. Market is the best place to determine whether your business venture would be viable or not. With the right set of questions and solid fieldwork, you can predict the fate of your business venture as well as convince the angel investor to invest in your company.

 

1. Competitive Advantage- The success of your business venture will depend only upon the salability of your products or services. Moreover, the angel investor would verify the competitive advantage of your product before deciding to invest in your venture. To make certain the competitive advantage of your product, you would have to determine the strength of your competitors. Identifying your competitors is a pretty knotty task.

 

If you own a departmental store, then you competitors are all those store in your area that deal in the same products as you. However, if you store contains products from all over the world or you manage a chain of stores, then it becomes quite difficult to find out who your competitors are. In such cases, surveys, interviews and polls can root out a lot of information about your competitors.

 

For instance, in an interview, you may ask your customers why they prefer your departmental store over others, what is it they like most about the store, where else they go and why, and what is it that keeps them coming back. With these questions, you can easily uncover the strengths of your business enterprise and at the same time reveal the weaknesses of your competitors.

 

Once, you have identified your competitors, you would have to describe them in the competitive advantage section of your business plan. Describe the method you have used to identify you competitors and enlist top five competitors. If you wish to impress your angel investors, then you can also include how your competitor would react to your presence, and how would you tackle the effects arising from that reaction. 

 

1. Management Efficiency- In addition to your expertise and management skills, the success of your company would also depend upon how efficient you staff and managers are. It’s a hardcore reality that businesses cannot be run alone. You need different grades of workers to assist you in all your entrepreneurial endeavors. A proficient and component management is an asset for any enterprise. Such a staff can easily handle any adversity.

 

Lack of management efficiency is the primary reason behind the hesitance that most angel investors exhibit when the question of investing in a particular company comes to the fore. In order to compel the angel investor to fund your business venture, you should provide a proof of your management efficiency in your business plan. Generously display their track records as well as the documents that demonstrate their expertise. Leave no stone unturned to convince the angel investor that your management is the best, and would strive hard to take the company to the highest pinnacle of success.

 

4.      Sales Projections- The hardest, but the most important part of your business plan is the sales projections section. Your angel investor would be immensely interested in this section because it will be the ultimate criteria on which he would decide whether to invest in your venture or not. Making projections is all about carefully listening to your intuition, and constructing accurate assumptions. In simple words, what your require is clarity of thought and lots of research work.

 

For instance, you plan to sell your product for $200 and to ensure that your product actually sells, you are ready to invest $100 000 in advertising. You believe that your advertisements would reach 150 000 people, and would persuade 35 000 individuals to buy your product. If you assume your response rate to be 2 percent, then that translates into 2 percent * 35 000 = 700 customers and $140 000 sales.

 

In the above case, you are solely depending on ads for your sales. Now, if you take into account the proposition of direct sales then you would have to set aside the budget for salespersons as well as make assumptions about how many sales one salesperson would make within a specific frame of time. This would follow the calculations in the same manner as above. Once, you get your sales projection, you would have to adjust them in accordance with your market size and penetration.

 

5.      Reasonable Valuation- Valuation is another significant section of the business plan. In this section, you evaluate the net worth of your business enterprise. Apart from determining the price of your company, valuation also helps to you to ascertain the nature, strong points, limitations and potential of your business venture. Once, you have estimated the true value of your company, you can workout strategies to increase your company’s value.

 

Valuation is also essential from the perspective of angel investors. On the basis of your valuation report, the angel investors can easily determine whether it is worthwhile to invest in your company or not. One thing that you should always keep in mind is that only a reasonable valuation can ensure that an angel investor actually makes an investment.

 

In order to get a realistic value of your company, all you have to do is divide the total amount of money you’re planning to take as an investment from the angel investor by the percentage to equity stake you’re willing to offer. If your company is still in the early stages of development, then the angel investor would expect as much as 50 percent of ownership rights in your company. If you agree to grant him 50 percent of equity stake for merely $10 million, then you would be estimating the value of your company as $20 million. This outrageous valuation figure is enough to shoo away the angel investors. Hence, it is advisable to appoint a qualified valuator for the correct valuation of your company.     

 

Expectations of Angel Investors

 

Capital from an angel investor is by no means a cost effective proposition. Some of the expectations of angel investors are as follows:

 

• Approximately 10 percent to as high as 50 percent stake in the company’s equity.
• Position in the company as the board of director.
• Approximately 10 to 20 times returns on the original investment within a span of three to five years.
• A monthly fee for offering management advice.

 

Keep your Angel Investors Happy

 

The only way to keep your angel investors happy is to keep them informed about the activities of your company. In other words, you would have to undertake the following actions:

 

• Convey the Good News- Your angel investors would always be keen to know whether your company is growing or not. Hence, be generous while conveying the good news to them. Email or fax company newsletters, product announcements and other business documents on regular basis. Also provide them annual business newsletter in which details as milestones achieved, financial performance and future plans are clearly divulged, and quarterly and annual audited financial statements.
• Disclose the Bad News- Don’t hide anything from your angel investors. If your company’s health is deteriorating with each passing day, don’t hesitate to tell your angel investors about that. Remember, angel investors are experienced entrepreneurs, and they can come up with a feasible solution.
• Manage Expectations- If it is necessary to make some imperative changes in your business plan, then do it, but only after informing your angel investors about it. Bear in mind that the angel investors have vested interests in your company. Therefore, you have got to manage their expectations properly to make sure that the capital steadily flows in.
• Seek Advice- Make the angel investors the most important part of your business. Commit to your memory that the investors are the happiest when they feel wanted. Hence, take their advice as often as possible.