We’ve been writing a lot about the important role of angel investors lately. I’ve been working on assembling resources for our readers on things like how find angels, what to look for in these small-scale personal investors and, of course, how to pitch them. This morning I found a good one in this book: Winning Angels: The 7 Fundamentals of Early Stage Investing, by David Amis and Howard Stevenson. Both men are angel investors, and Stevenson is a professor at Harvard Business School.
In a long piece about Amis, Inc. magazine reviewed the book this way: “a practical guide for angel investors, it also can be read as a playbook for winning over angels. I’ve adjusted the athours Seven Steps accordingly, and here are the highlights…
7 Steps to Netting an Angel Invester:
Step 1: Identify yourself. One of the best bits of intelligence here is Amis’ method for sizing-up founders. Within seconds of shaking your hand for the first time, Amis has already put you in one of three file folders he mentally carries at all times:
Lifestyle entrepreneur. You enjoy owning your company … making sure your pleasant existence continues is more important to you than creating the next billion-dollar company.
Empire builder. You love your company’s growth rate… love being the ruler of your domain…wouldn’t sell the company if your life depended on it. They’ll carry you out with your boots on.
Serial Entrepreneur. You’ll expand your company to the best of your ability, sell out or go public, then start another company. Then you’ll do it again. And again.
Unless you’re in category 3, Amis won’t fund you!
Step 2: Identify the right angel The best angels are always looking for good new deals. They call it “sourcing.” Before you go courting them, do some sourcing of your own….Here are five traits all good angels share:
- Contacts. You want angels who can help you locate suppliers, customers, and employees. Ideally, your angels will know important players in your industry.
- Industry experience. You want someone who know or has worked in your industry.
- Entrepreneurial chops. Angels who have previously raised money for their own companies tend to be easy, quick, and direct to work with. They also can detect the likely trouble spots in your company.
- Angel chops. It’s four times easier to deal with someone who’s been an angel before than it is to work with an investment first-timer.
- Medium-deep pockets. The ideal angel has a personal net worth of $2 million to $50 million. If an angel has more than that, the $50,000 your company needs may fall beneath his or her radar
Step 3: Your company’s fundamentals. Once you’ve identified potential investors, you must next prepare to cover these four areas in your first meeting with them:
- People. You your management team, but also your other investors, advisers — anyone who has a stake in your company’s success.
- Business opportunity. Your b-model, market size, potential and actual customers, and the timing of the opportunity.
- Context. External factors that could affect your business, including available technology, customer needs, the overall economy, regulation, and competitors.
- Deal. The price of the deal you propose and its structure.
Step 4: Valuation. How much money are you trying to raise? And what amount of ownership are you willing to give up? Angels will price your company based on its potential capital return, so expect the valuation to be a big debate. But Inc. offered a handy checklist of assets to start you off with a “back of the envelope” valuation:
- Sound idea = $1 million
- Prototype = $1 million
- Quality management team = $1 – 2 million
- Quality board = $1 million
- Product rollout or sales = $1 million
- TOTAL potential value: $1 – 6 million
Step 5: Structuring the deal. Three are many questions to consider, but here are the biggies:
- What type of financing will the angels provide: equity or debt?
- If equity, what kind?: Common stock, preferred convertible with various terms, and convertible note with various terms? Common stock is the simplest but provides few safeguards to the investor. Preferred convertible is more complicated but can benefit the investor to a greater degree. Convertible note allows no negotiation on price but offers angels the most protection.
- On what terms? Will the investors get their cash back before the entrepreneur does? Will the angels have the right to invest in future rounds?
Step 6: Negotiation. (Psst!: You don’t need to do it!)
Angels tend to focus on the numbers, specifically their initial ownership stake. They believe that will have the greatest impact on the future value of their investment, so many will bargain hard over it. Angels also …prefer to take their time during negotiations, not least of all in the hope that you’ll eventually come around to their terms. [But] There’s no reason why you, the entrepreneur, can’t take the same no-negotiate position.… If you’re asked why, simply say you don’t want to start your relationship on adversarial footing.
Step 7. Leveraging the relationship.
Closing the “deal” is not the end, but the beginning.
Angel investors can also help your company move toward what investors call “value events…” Examples include signing deals with strategic partners, lining up venture financing, and landing a well-known account.…
The best entrepreneurs provide regular updates, monthly notes along the lines of “We are currently trying to contact XYZ Industries to see if we can make it a customer.” Use these to jog an investor’s memory. Your angel might know the person, or how to make the contact.