Shark Tank – Funding a Startup? – Angel Investors

Raising capital is no small task; in fact, it can be likened to the process of climbing a ladder. At each rung, you achieve new goals for your company and the height of your ascent represents the value of the business. Initial financing are often the first or second rungs. Now, before you try to get all the media’s attention by charging into a VC’s office you should first consider Angel Investment.

Angels are wealthy individuals who will attempt to help finance your business with personal checks for anywhere from $20,000 to $1 million. Choose your Angel investor very carefully. The initial funding of a few hundred thousand dollars may allow you to quit your day job, and enable you to focus more time on the setting up of the business. Also, this construction capital should be adequate while not diluting the company’s ownership significantly.

Don’t be shy about Angels! Start looking early, and tell everyone about what you’re doing. Don’t worry about giving away too much of your idea nearly as much as not getting early funding soon enough. A good start is to talk to friends, family, lawyers, PR firms, accountants, and marketing consultants–anyone who’s had dealings with Internet Startups. It is very important to keep in mind, however, that we’re looking for more than just money here. We want an honest commitment from Angels: we want them to make the venture a success.  They should assist in developing contacts, recommending potential employees, identifying a good public relations firm, negotiating licenses as well as supplying however much capital is needed. Ask them to take an active role in the company, and tell them outright that you will expect them to make the startup a success. Even offer a position such as formal advisor or director of the company.

When beginning your pitch, keep your purposes in mind: you want to entice them to call you for a more extensive conversation. But keep you plans to yourself at first. Your initial goal is not to get them to invest on the first communication. You may want to put together an abridged business plan: essentially, a document version of the startup story we discussed in the previous Blogged entry. Keep your business plan concise; remember there is no substitute for fundamentals.

 The size of the investment should depend how high you are on the ladder. Are you in grad school and armed only with your idea? Or are you actually in business and have a product and revenue? Don’t worry too much about the exact numbers, as Angels are probably more aware of the ladder than most entrepreneurs. And they realize their place in the grand scheme of things: they give you a little now, so that eventually, you will ask for millions later from a VC firm. In terms of equity, it is not unreasonable to give 20 percent of your company to a first round Angel.  Just remember that initial investors will be heavily diluted in following rounds of funding. By the time an IPO rolls around, they may only account for a few percentage points.

Special investor rights are a common form of deal that angels may want to try to cut. Here’s where hiring that great lawyer will come in quite handy. But keep in mind; you’re negotiating in the spirit of partnership. After all, your very first employees are somewhat like founders. Similarly, initial investors deserve a special place. Don’t try to bully an Angel the way you would approach a VC, but also, don’t waste your time with someone who acts like his $50,000 check is a term sheet. You want to conduct yourself in a professional manner, reasonable and attentive. Find someone with whom you relate well, because once the dotted line is signed, the knot is tied.

Keep the faith, just remember, if it was that easy everybody would be doing it.

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