At every stage of your young company’s life, there will be a need to raise money.
Raising money from investors is challenging and requires a lot of thought and planning in order to prepare a great pitch and presentation.
I know what it’s like to pitch to investors—both angel investors and venture capitalists. I’ve raised close to $20 million from angel investors for my current early stage technology business – and a lot of that money came from me, my friends and/or colleagues.
What I found with my current business venture is that, despite a strenuous effort on our part and some high-powered introductions, it was impossible to find money from VC firms to grow our business. We decided to go the angel investor route and I’m glad we did.
Our business model of bringing affordable energy and clean water to impoverished and emerging nations in tropical and sub-tropical regions of the world is well-proven and economically feasible. It is very important to my company that we are successful in commercializing our technologies so we can help alleviate some of the world’s biggest problems.
Unfortunately, many of the VC Firms we met with seemed to be more interested in making money by investing in historically profitable businesses rather than supporting an early stage business with a strong focus on humanitarian solutions.
More frustrating for me though was the total lack of interest in our business model, in spite of statements made by these VC’s on their websites as being interested in supporting early stage businesses with a focus on sustainability. The San Jose Mercury News recently wrote an article describing the issue, saying: ‘many VCs continue to resist investing in viable businesses bringing toilets, water and electricity to the rural poor’. So, it seems as though it’s not just my company that was ignored (not that it makes me feel any happier).
Unless your business can demonstrate revenues (and are profitable), my advice is don’t bother with the VC Firms.
Thankfully, there are plenty of private investors around known as ‘angels’, who you can tap for equity financing—typically with far fewer strings attached than a VC deal. And that is how we funded our business.
You’ll need to pay careful attention to the rules regarding obtaining investment support from an angel investor. Under the Securities Act of 1933, a company that offers or sells its securities (shares or other investment instruments) must register the offering with the Securities and Exchange Commission (SEC) or find an exemption from the registration requirements. There are a number of exemptions that you can use to raise money without having to file your fundraising offering with the SEC. These exemptions include rules 505 and 506 of Regulation D, whereby a company may sell its securities to what are known as “accredited investors.” The term ‘accredited investor’ is defined in Rule 501 of Regulation D. Raising funds through angels isn’t as complicated as it may sound. But my advice is to consult with a Securities Attorney to help you through your fundraising effort. Some of the better Attorney’s may have introductions to angel investors.
In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least $1.0 million, not including the value of their primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with their spouse if married) and have the expectation to make the same amount this year.
Once you have decided on how much money you will ask for and what terms your company is prepared to offer, its time to create a pitch deck covering your background, experience, drive and spell out the product, business model and financing you expect to need. Guy Kawasaki has a great website explaining that a pitch should have ten slides, last no more than twenty minutes, and contain no font smaller than thirty points. He’s right.
Pitching angel investors can work successfully, as we proved with my company.
Here’s the way we did it.
My business partners and I knew many people who had some sort of contact with either us, or our Company. We decided to approach them first.
Our group included professional providers of service such as doctors, dentists, lawyers and accountants. We also knew a number of business owners, entrepreneurs and suppliers.
We set up meetings at our office, in restaurants, hotel lobby’s, potential investors homes – in fact, anywhere we could!
We found that many people we approached were pleased to hear of our opportunity. After meeting with us, reviewing the slide deck we shared and explaining details of our company, many of them invested and introduced other investors.
Some of the people we spoke to who were not interested often recommended a colleague who was.
It takes a lot of legwork and meetings so you need to make sure your pitch is perfect (see my earlier Blog on business meetings). The important thing is not to get discouraged. Not everyone you meet will invest.
Angel investors look for many of the same things professional venture capitalists look for. Entrepreneur Magazine has a good book called ‘Start Your Own Business’ in which they describe some of these important points you’ll need to cover with angel investors:
- Strong management. Does your management team have a track record of success and experience?
- Proprietary strength. Proprietary doesn’t necessarily mean you must have patents, copyrights, or trademarks on all your products. It just means your product or service should be unusual enough to grab consumers’ attention.
- Window of opportunity. Investors look for a window of opportunity when your company can be the first in a market and grab the lion’s share of business before others.
- Market potential. Investors prefer businesses with strong market potential. That means a restaurateur with plans to franchise stands a better chance than one who simply wants to open one local site.
- Return on investment. Most angels will expect a return of 20 to 25 percent over five years. However, they may accept a lower rate of return if your business has a lower risk.
What makes an angel invest? Angel investors are usually guided by an entrepreneur’s passion. Demonstrating confidence is key. Explaining your persistence and success in prior ventures helps. College education and/or military service will go a long way in your discussions, but remember it is passion and experience that the investor is looking for. Don’t be afraid if you have a failure or two in your business history. Explain what you have learned from those experiences and why those issues will likely not occur again. Always remember, pencils are sold with an eraser. Angel investors are not meeting with you for a ‘Gotcha’ moment; they are interested in your opportunity.
In the United States, we are fortunate that we live in a society that backs entrepreneurship. If you have a great idea, are passionate about it and can articulate the opportunity to angel investors, you’ll be successful!
Good luck in pitching investors and your fundraising efforts.