Some founders bootstrap their businesses from Day One. Maybe they have a trust fund or their company has very few initial capital requirements. But most entrepreneurs need financing of some kind to get their businesses up and running. Founders leveraging a new market insight or piece of technology face a venture finance landscape in flux.
The top quartile of VC funds have raised record amounts of money from LPs. The large fund sizes mean they are investing later and later in the lifecycle of portfolio companies. Accelerators like YCombinator, Techstars and 500 Startups are making seed investments programmatically. AngelList is dramatically changing the landscape and transparency of the angel investment process. The rise of superangels has even brought the category of ‘angel investor’ into question.
But for first-time entrepreneurs, the key question remains the same: how do I get someone to write me a check? I’ve been a founder, early team member, entrepreneur-in-residence at a VC fund, and consultant/adviser to many high-performing startups and venture investors. My recently released tech startup thriller novel revolves around seed financing. This question comes up a LOT. I figured it deserved a thoughtful answer.
So I talked to two people that I thought might have interesting (and different) perspectives. George Eiskamp is the CEO of GroundMetrics Inc. GroundMetrics is based in San Diego and has developed a new kind of electromagnetic survey system that helps oil companies find oil and model geology. George raised his seed round from angels. He raised his Series A1 round from angels. He raised his Series A2 round from angels. He just raised his Series B round through a syndication of the Cowboy Technology Angels, Tech Coast Angels, and the Harvard Business School Alumni Angels. Wow. He knows what he’s talking about.
Franco Faraudo made his first angel investment last month. He has a variety of real estate and public market investments but wanted to diversify his portfolio into early stage technology plays. Franco’s outlook is interesting because its fresh. He hasn’t spent years making venture bets so entrepreneurs can see what’s going on inside his head without too many caveats.
After talking to George and Franco I tried to condense their advise into actionable take-aways. Let me know what you think and feel free to add thoughts in the comments.
How to raise money from angel investors:
- Get over the starting line. You’ll never get in the door if you don’t knock. “I began by reaching out to a few folks I knew who had been successful business people,” says George. “I asked them what they thought and whether they knew anyone who might be a good fit.” It’s a networking game so you need to work hard to build your pipeline of potential leads. “Generate competition,” he continues. “that’s your greatest asset for creating urgency in a negotiation.”
- Know your audience. “I wanted to diversify my portfolio,” says Franco. “Right now, most of my investments are in real estate or public market stocks. I’m enjoying investing in startups because you have to make long-term bets based on business fundamentals.” When you talk to angels, make sure you think about it from their perspective. It’s easy to get so absorbed with describing your breakthrough new product that you forget what brings THEM to the table.
- Put lipstick on the pig. You want your investors to fall in love with you. “Initially our pitches focused on nuts-and-bolts,” says George. “I used Smart Art in Powerpoint to create our product visualization. But in this latest financing round we put a lot of effort into refining our story and it paid off big time. I worked with a graphic designer to illustrate exactly what our technology does and the response from investors was immediate.” Remember that a pitch is like any other narrative. You need a cast of characters, narrative hooks, plot twists, and a killer punch line. The classic outline looks something like this: problem → solution → team → traction → deal. Whatever you do make sure to answer these questions: Why this? Why you? Why now?
- Build long-term relationships. Early stage investing is all about trust. Don’t treat investors like ATM machines. Treat them like friends. “I plan on making angel investments later in life,” says George. “I try to treat ever angel I meet as I want to be treated down the line.” Your startup might not be the right fit for this or that angel. But, who knows? Maybe they’ll be perfect for a different financing round or your NEXT startup. If you build friendships with angels you’ll always have that network to tap.
- Find a champion. “As a first-time angel, it’s hard to know what you don’t know,” says Franco. “Many angels like me make decisions based on advice from trusted friends.” Social validation plays a key role for many investors. That means that entrepreneurs need to find angels who will champion their startup. These people will be your ambassadors to the larger investor community and help them flock to your cause.
- Leverage platforms. “I’ve pitched around 200 angels and we have about 100 shareholders in GroundMetrics,” says George. “One of the first things we did was find angel groups to pitch and meet with. Now AngelList is democratizing the entire fuzzy front-end.” By accessing communities of angels, you can short-circuit some of the time it takes to build your investor pipeline. They’re not a panacea but they can help you get into the mix and learn the lingo.
- Open the kimono. “What information do I have to inform my bet?” asks Franco. “Often best I can find on Google is a landing page for your startup.” Startups don’t have years of data on which to base investment analyses. “I provide our shareholders as much data about the core business as possible,” says George. “We’ve seen the results: two thirds of our investors have followed on in later financing rounds. That’s incredibly rare and we attribute it to the combination of things going super for GroundMetrics and maintaining a good line of communication with shareholders.” The more detail you can share with potential investors the better (although it better be well-organized!). In fact, setting the scene is one of the greatest tools you have at your disposal: you are setting the context for their investment decision.
It’s hard to raise money from angel investors. The good news is that there are more opportunities to engage with them than ever before. If you are absolutely relentless about building your business, investors will come out of the woodwork to support you. Focus on building momentum and keep some of these tips in mind as you start your angel road show.
It’s just the beginning…
P.S. If you enjoyed this post you might also like Raising your seed round.
Need help crafting your story? I work with entrepreneurs, executives, and investors to articulate, refine, and share the stories that define them.
Eliot Peper is the author of Cumulus, Neon Fever Dream, and The Uncommon Series. He’s helped build technology businesses, survived dengue fever, translated Virgil’s Aeneid from the original Latin, worked as an entrepreneur-in-residence at a venture capital firm, and explored the ancient Himalayan kingdom of Mustang. His writing has appeared in Popular Science,Businessweek, TechCrunch, io9, VentureBeat, Entrepreneur, Forbes, Xconomy, and Ars Technica, and he has been a speaker at places like Google, Qualcomm, and Future in Review.