James David Williams
Things to Know When Seeking Angel Funding
Early Investors Invest in People, not Companies
If you are seeking angel funding for your startup, then you are at the beginning of your entrepreneurial journey. You may not have much more than an idea made into a short PowerPoint presentation. Angel investors know this and expect this. You may want to spend a great deal of time building a pitch deck with lots of fancy projections of tremendous growth, but you should know that investors rarely consider such projections. At the earliest stages in particular, most investors will be focused on whether you have found a problem that is worth solving and whether you are the right people to solve that problem. Of those two things, being the right people is more important since early investors are aware that pivots happen and the market you think your startup is targeting may not be the market where your startup eventually finds its niche.
Angel investors often serve an advisory role for the companies into which they invest. This means that angel investors are going to be more interested in companies with founders they want to support, mentor, and help in the early stages of the startup journey. You as a founder should think about this too when you consider which angel investors to target for your pitch as potential angels could help you fill an expertise gap in your founding team or could introduce you to the power players in a market or industry to help get your company started.
First and foremost, you must demonstrate to potential angel investors that you are a person of integrity. No one wants to invest their money in a fraud or a cheat. You must be able to explain how your background and credentials make you the right person or team to start this company. Be ready to talk about how your company is trying to solve a problem that you have faced as an individual. Knowing the problem deeply goes a long way towards finding the solution. And be able to project confidence that you are the right people and the right company for the potential angel investor to choose. Investors see a lot of potential deal flow and must be selective in allocating their time and capital. Believing in yourself and letting that belief be expressed during your elevator pitch or your full presentation can go a long way towards getting your startup funded.
Have a One or Two Sentence Elevator Pitch
You should be able to tell investors what your company is trying to do in only one or two sentences. The more you are able to condense your idea, the more likely investors are to remember what you told them and the more likely you are to truly understand your idea and the vision for your company. Investors can tell that when a founder is rambling in a pitch the founder either doesn’t understand the business or isn’t the right person to build the business.
One more thing here—use simple language. People remember simple phrases much more readily than complicated ideas. So take some time and effort and hone your company’s value proposition down to just a few words before you start pitching potential investors.
Assign Intellectual Property to the Company
It is important that all of the intellectual property (often software but this can include patents, trademarks, copyrights, and more) are in the name of the company before you solicit outside money. This will be part of most investors’ due diligence process and will need to be corrected then anyway, so it is better to do so in advance. It is also important that if you hire outside consultants or contractors to perform services for the business or to develop software or to do anything else for the company that those agreements make clear that the company is the owner of whatever materials or code is produced by that consultant or contractor. You do not want to have a situation later where some developer sues your company saying that they should have an ownership interest in your company because your company built a successful business using the code they wrote.
Investors want to see that the founders have the proper incentives to work for the company for the long haul. The journey to success as a startup often takes several years, and if things are not structured properly then key members of the founding team may abandon the startup when the going becomes difficult. The easiest way to achieve the correct incentives is to have the founders’ equity, along with key employees once the time for hiring people comes, vest over a period of time. We have written more extensively about the mechanics of vesting HERE, but for this article it is sufficient to say that most investors want the founders’ shares to vest over a period of years so that founders have a reason to keep working hard to build the business instead of just sitting around and profiting from the work other people are doing for the company.
Ensure You Have a Plan for the Money
Before you solicit outside money for your startup, you should have a plan for how you are going to spend the money. In the industry, this plan is called “use of funds,” and many investors require it before they will invest. From the investor perspective, the idea is simple: I want to know how my money is going to be spent. For a startup, preparing a use-of-funds plan is a helpful exercise for a few reasons. One, it provides a sense of how much money the startup should be seeking to raise in its initial funding round. Two, it requires strategic planning concerning how much it will cost to reach certain milestones (developing a minimum viable product, obtaining initial customers, building a sales team, etc.). Even if your estimates are inaccurate, and they will be, having estimates is still worth the trouble.