Finding An Angel

November 28, 2012

The economy is weak, capital is scarce and Congress is considering a new tax on angel investing. Money is difficult to come by for almost any business.

Yet entrepreneurs seeking angel funding often believe in their business so strongly, they don't understand why investors aren't lining up to give them money.

If you're an entrepreneur seeking angel money, you need to understand that getting financed is essentially a marketing project — you're marketing the future potential of your business. To do so successfully, you need to understand the angel investors who are your target market.

The people with the money are smart investors. They don't need to invest in your business to become wealthy. In fact, they have millions of other options. They can invest in any of the thousands of other businesses that are looking for money. They can invest in stocks, bonds, derivatives, real estate, gold, racehorses or anything else. They can have a great time in Vegas, travel the world or leave their money to their kids.

So why should they invest it in you?

Surprisingly, entrepreneurs don't always ask themselves that question. In fact, they sometimes think the process is about them and their business. By not thinking about the people with the money, they make mistakes, such as:

1. Thinking a great idea is enough. Congratulations on your great idea. Want to know what it's worth? Until you can translate it into a real business, absolutely nothing. To be attractive to investors, a great idea has to be supported by a great business plan, great financial projections and a great management team.

2. Having unrealistic expectations about the value of your business. One business owner seeking funding recently suggested that his business "doesn't fit the traditional valuation model." Guess what? It does. Like any investment, your business is worth what the market says it's worth.

3. Failing to consider scalability. "Scalability" is one of those words that is said too often, but not applied often enough. If your business is a service business, for example, how are you going to replicate it in other markets?

For a business to be scalable, technology must typically be incorporated into the business. If it's not, the business is unlikely to be able to grow quickly enough to satisfy the needs of investors.

4. Messing up the presentation. In one case, an entrepreneur with a medical software product had investors ready to throw in millions of dollars — until he presented his business idea to them.

The PowerPoint deck explaining his business was rife with typos and had so much information crammed onto each slide, it was barely readable. The investment group asked him questions that he didn't answer. The investors quickly decided to take their money elsewhere.

Investing in a professionally developed deck of 15 slides or so may be the most important investment you can make if you want to capture investors' interest.

5. Not having audited financial statements. Just as a bank wouldn't approve a mortgage for someone with a low credit score, angel investors aren't going to invest in a business that has questionable financials. Be sure your books are in good order. Make an effort to reduce your receivables if necessary before seeking funding.

Think you can avoid these mistakes? If so, the next step is to pretend you're an investor who knows nothing about your business. Ask yourself if you had a few million dollars to spare and someone came to you with the same business concept, whether you would invest your money into your business.

Unless you can answer with a resounding "Yes," postpone your quest for angel funding.

 

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