Means to fund my idea
Angel Investing 101

Who is he, that Angel Investor?

Doctors, lawyers, business associates, serial entrepreneurs, and other wealthy individuals that are willing to put some money into your business are considered angel investors.

They are people who believe in YOU and your project, and are willing to invest in your venture for a slice of the pie.

Generally, they must have $1 million in net worth, and make at least $200,000/yr ($300,000/yr if married). They invest in your business, and you sell them equity in your company.

Angel investing can be very risky for the investor. In some ways it’s gaming for them, like an adrenaline rush! They will only invest if they are truly confident in YOU and your project. They risk losing all of their investment if your invention goes south, as a matter of fact it’s up to you to get them to believe in you and prove that your idea will work. Give them that excitement to make a right bet. On the other hand, investors love write-offs when it comes to a tax season. Your failure may be good for their returns. So, keep that in mind as well.

Angel investors often look for certain qualities in inventors and entrepreneurs. They care about your passion and commitment. They are looking for an opportunity for the project or company to become very big, think billions, not millions. Especially in the southern region (Think Texas, Louisiana, Arkansas).

A clearly thought out business plan is a must. Milestones are key. They don’t care how much you spend on marketing or your workforce. They do want to understand your revenue model, your products, your markets, and patents – anything that will increase the valuation of your company.

When investors look to any deal, they keep in mind the idea that there are at least four different companies or people working on the same project. They are looking for what sets you apart – your personal attributes and credentials.

Your drive and dedication. Let them know you are their best bet!

Angel Investors need to understand that you have a solid
plan inplace, and a will and desire to execute that plan.

Another way to find angel investors is through other professionals and their associations in the business world, for example as lawyers, accountants, product development companies, venture capitalists and other business networking groups. Have your elevator pitch ready, segment your contacts and see who can introduce you to whom. Your high-school classmate, whose father-in-law works at the firm which invests in your type of product, might be a good start.

Incubators and accelerators are another good way to find financing. EAP, Station Houston, and Capital Factory, to mention a few, maintain a network of investors who are looking for new opportunities. They will also be able to help with nailing your pitch deck. Be careful though not to give up too much equity at the beginning to any economic development entities as mentioned above.

Remember, that angels bring not only funds to your deal, but also connections and expertise. Overall be strategic when it comes to selecting the investors. Not all investors will be a good fit, so set up criteria that fits your company and vet investors accordingly.

Be creative in identifying, nurturing and converting your investors. Careful with selecting the lead. Bold and consistent early so later you will be able to close your first round.

Meeting with an Angel Investor

Before we dive into what is needed for the first meeting with investors, let’s take a look at the way the investment rounds go:

Entrepreneurs have questions they need to have answered before an angel investor will part with his or her money. Expect to be put on the spot when meeting with an investor, and be prepared to answer any and all questions they may have. Some items angel investors will want to see are:

• Your elevator pitch for the business
• Prototypes for your product or service
• A customer list, if you have one
• Why the investor should invest in you. Investors believe there are four companies, on average, working on the same project. You will need to stand out.
• What you will be using the money for, and how long you believe it will last
• Milestones to increase the valuation of the company

When you are doing your market research, be creative. Remember that investors are looking for opportunities of $1B, especially in the South. It’s up to you to find where that money is. Pretend that you are doing a school project and getting feedback for a class when doing surveys, people tend to answer more openly in such cases. Online surveys work too, in the form of Zoom meetings or Amazon’s or Survey Monkey solutions.

Generally, investors are okay with an exit strategy about $100m. So strive for that goal.

Even though you are not required to disclose the amount of investments other investors made, it’s generally a good idea to stick with a similar term sheet to avoid confusions and save on attorney costs. Let investors know they are the same or you will be black listed. The investor community is a small community. And people talk.

Angel investors will also want to know all about you and your company. For instance, as practice shows, investors typically make a bet on you if you have been working on your ideas for at least 2.9 years. So, get ready to spend time and money upfront – to be sure that your idea is legit and you are fully committed to make it a success. The key players, the founders, the financial status currently, your goals, business plans for the next year, and what motivates you to succeed are all items the investors may want to discuss. Keep your answers clear and precise, easy to understand. Investors won’t tell you if they are confused, they will just say no and move on another deal.

The Convertible Note

Convertible note is a debt (not like a student loan debt). You owe your investors not the money, but the equity of your company down the road.

The Term

Sheet

The Term Sheet contains information on what your investor will receive if they decide to invest in your business. Be sure that your rates are clear and fair to both parties.

Discount rate – States what rate the investor can “buy in” to your company for, usually in year two. For example, when my share will cost X amount – you can purchase them for X-20%! The money you gave me two years ago will be converted to equity as you have given me X dollars. The typical discount rate is between 15-20 percent.

Interest rate – As with any money that is borrowed, an interest rate often applies, usually running between 6-7 percent. Investors get to enjoy the additional thank you for taking an early risk on your company.

Valuation cap – If your company takes off, you’ll want a valuation cap in place. Your company may be worth more than $1 billion, but for your angels it will still be considered worth your agreed valuation cap, usually someplace between $3 – $10 million.

There are other items to consider as well, but these are your big three. Keep in mind that while you set these for your first round of financing, this information will need to be relooked at for each subsequent round as well.

When investors do a convertible note, they don’t have the right to manage or modify the strategy of your company. But as we said before, be strategic with investors’ selection and listen and ask. They often have good information that can help you build your company.

Investors love to work with the same legal team. They love to have similar term sheets to review. In the same way they love to de risk themselves when it comes to legalities. Make them comfortable by sticking to the standard forms and terms and get them excited with your idea! Investors will never tell you that they are confused – they will just say NO.

In general, investors prefer you to have a C-corp as an entity designation registered in Delaware.

Getting money from an angel investor takes time, the whole process can take 6-9 months, but may be well worth it for both you and the investor in the end. Investors love the rush when they find a project they believe is worthwhile.

Closing the round

As was said before, angels are down for an adrenaline rush! Announcing closing day is an amazing strategy.

Closing day is the last opportunity for your investors to put their dollars into your venture for a specific round.

As many entrepreneurs confirmed, most of the checks they have received were during that last evening. The idea to miss out is unacceptable for investors. Type A people are always down for a win.

In the southern region the time to raise your first round might be lengthier compared to either East or West coasts – but that is actually a good thing.

Being consistent and making rounds of changes before the launch will make you closer to the success and help you to avoid many mistakes. Get ready for a 6-9 month ride to get your first checks.

Make sure that you have set up a bank account. Usually investments will be made by checks. Some can do a wireling. Be prepared for your first check.

Update Your Investor

Closing day happens, checks are signed, money is transferred, and all parties are happy, but this is not the end of your relationship.

Remember to update your investors, with both good and bad news. Investors have often navigated the ups and downs of the business world, and if you have an issue, they may be able to help you through it.

They will want to be kept in the loop on what their money has done for you, so monthly updates will keep them from being surprised at anything that might come up.

Don’t make such updates too formal (unless they asked for it). At least Monthly or quarterly email updates might be the best format.