How to Fly with Angel Investors

You’ve got an ambitious business idea, done your initial research, started developing your product and you need some investment to finish building it and take it to market. This is a common situation for young entrepreneurs to find themselves in.

In this article, we’ll explore one potential solution: Angel Investors. These are usually wealthy entrepreneurs who are looking to invest their own money in early-stage businesses. In addition to offering your business money, they can also offer their advice, experience and knowledge.

[Note: my advice throughout this article is tailored towards raising money from UK-based Angel Investors, however many of the principles apply elsewhere]

What do I need to have achieved in order to raise funding from Angel Investors?

This can vary a lot between investors so my main piece of advice is to speak to some Angel Investors as early as possible, in order to find out what they would want to see before investing. They will generally want to see a prototype (or detailed product mock-ups at the very least), some market analysis and potential ways your product can make a lot of money.

One way to significantly increase the chance of getting investment is to demonstrate some early traction in your market. If you’ve been able to develop a basic prototype web application then get some early users, or if you require investment before you can finish building your product, see if you can get a letter of intent from a potential customer saying that they will purchase the product once it has been developed.

How long will it take?

Allow 6 months from the time you start putting your plans on paper to the day you get the investment in your bank account. 3-6 months is the typical timeframe – for GroupSpaces, we started this process at the beginning of August 2007 (I graduated in June 2007) and received money in the bank on 21 January 2008, so we took about 5 months. If you’re already growing your user-base / customer base very fast and have a lot of investors interested, it might only take you 2-3 months.

How much should I raise?

As a rule of thumb, you should raise enough money to get you to the next level financially. Usually this means being able to raise more money at a higher level, for example raising enough money from Angel Investors to be able to raise money from Venture Capitalists before you run out. If you’re able to generate significant revenue early on with your business, this may even mean raising enough money to become profitable.

To calculate a number, you’ll need to work out how long you’re likely to take to get you to the next level, and how many people that requires. From this you can work out your costs over the time period, subtract any revenue you’re confident of generating, add in a ‘fudge factor’ of an extra 3-6 months as you’ll probably take longer than you think and hey presto, that’s what you need to raise.

For example, let’s say you think it’s going to take 12 months for 4 people to launch your web startup and get 100,000 users, at which point you fancy your chances at raising Venture Capital. Since you’re a web company your overheads are minimal and you’ve worked out your costs are 75% salaries. You need to pay £25,000 salaries and you want to give yourself 18 months so you have some breathing room. That means you should look to raise about £200,000.

Salary costs for a year and a half: 4 x £25,000 x 1.5 = £150,000. This is 75% of anticipated costs, so total anticipated costs: £150,000 x 100/75 = £200,000.

What valuation might I receive?

Something that initially surprises many entrepreneurs is that valuation is typically an output rather than an input to negotiations. In the above example, you need to raise £200,000. If you are speaking with Angel Investors, they are likely to collectively want to own 20-30% in return for investing their money. Therefore your valuation after the investment will be between £666,667 and £1,000,000.

Taking investment from personal friends or family members often means you can get away with them owning a lower percentage in return for their investment, however this is usually negated by them being able to afford to put in less money than Angel Investors.

How do I find potential investors?

1. Angel Investment Networks
   These are what Dragon’s Den is based on – you’ll get 10-15 minutes to pitch your business idea to a room full of Angel Investors, probably followed by 5 minutes of Q&A, and an opportunity to speak personally with interested investors over an hour of drinks afterwards. It will likely cost you ~5% of any money you raise and you might have to pay a few hundred pounds to pitch. If you’re successful, this will be money very well spent.

   We raised GroupSpaces’ angel investment round via an Oxford-based network and strongly recommend seeing if you can get a spot at one, particularly if you can find one local to you. There is a list of 25 of the main networks in the UK on the British Business Angel Association website.

2. Personal Introductions
   Approaching Angel Investors with a ‘cold call’ email is unlikely to get you very far as it is very difficult to establish trust out of nothing. You are much more likely to be successful if you can get personally introduced. The best type of introducer is, in order of preference:
   (a) another investor who is already keen to invest in your round,
   (b) another entrepreneur who the Angel Investor has backed before,
   (c) your lawyer/accountant,
   (d) your friend who met the investor at some event last year.

If you are struggling to think of someone who could introduce you to a prospective investor, try looking on LinkedIn or Facebook to see if you have any mutual connections or friends.

For a list of some prominent UK-based Angel Investors, check out this list on the Seedcamp website.

How do I go about the fundraising process?

First, create your “deck” and prepare a demo. A deck is the word used to describe a PowerPoint presentation of 10-20 slides summarising the key areas of your business. If you haven’t created one before, read The 10/20/30 Rule by Guy Kawasaki for a quick tutorial. For the demo, if you have a prototype product ready to demo, great; if not, then create some basic mock-ups of what your product will look like and how it will function. Your objective here is to capture your investor’s imagination and get them to envisage how the product could work in the future.

Before showing your deck or demo to any investors, I would strongly recommend you practice your pitch with a few other entrepreneurs, friends or family members in order to get some initial feedback and gain familiarity with your materials.

Next, create a shortlist of 10-15 target investors / investment networks that invest at the level you’re looking to raise, making sure that for each individual investor on the shortlist, you have identified someone who can introduce you to them. In the above example, you might be looking for Angel Investors that invest £50k or more, with the hope of finding 1-4 to make up your round.

Once you have your deck, demo and shortlist ready, call in your introductions and start meeting your prospective investors.

What’s the best way to pitch?

There is no ‘one size fits all’ approach to pitching. I would encourage you to be yourself as investors are generally very smart and will see straight through any act you put on. If the investor has a website, blog or Twitter account, I would encourage you to read that to see what areas of your business they are likely to care more about.

Don’t worry if your first couple of pitches don’t go that well. As you pitch more people, you’ll learn what works and start to see what questions you keep getting asked, and how to best answer them.

Some common mistakes I’ve seen young entrepreneurs make are:

• Not thinking big enough (i.e. answer the question: how big could your business become?)
• Not appearing determined/focused enough (show the investors how passionate and driven you are!)
• Getting too caught up in details about the product and not seeing the big picture
• Not having tested any assumptions around marketing channels

Above all else, try to make sure you get on well with the investor – if they don’t like you, they’re not going to invest!

Which young entrepreneurs have successfully raised angel investment recently?

Here are some examples of 6-figure angel rounds that were recently raised by UK-based startups with student or very recently graduated founders:

• Spoonfed (www.spoonfed.co.uk), a web and mobile what’s on guide to London, was started by LSE students Alexander Will and Henry Erskine Crum in 2007 and raised 6 figure angel rounds from UK-based Angel Investors in summer 2008 and summer 2009.
• Songkick (www.songkick.com), the online concert database, was started by Cambridge University graduates Ian Hogarth, Pete Smith and Michelle You in 2007 and raised 6 figures in March 2008 from a consortium of UK- and US-based Angel Investors, having taken $15k from the Y Combinator seed fund in summer 2007.
• GroupSpaces (www.groupspaces.com), my startup which takes the pain out of managing groups, was started by Oxford students Andy Young and myself in 2007 and raised a 6-figure angel round via an Oxford-based Angel Investment Network in January 2008.

Resources

To read more about what’s involved in raising angel investment for your startup, check out the following sites:

1. www.venturehacks.com – the best guide you’ll find on startup fundraising, albeit with a slight bias towards US-/Silicon Valley-based deals
2. www.paulgraham.com – a collection of the best essays ever written about startups, fundraising and hacking
3. www.bbaa.org.uk – the British Business Angel Association

I would also strongly encourage you to speak with other entrepreneurs you know who’ve raised investment at a similar level to you. Finally, you can get in touch with me in the comments or via Twitter if you want to ask any further questions – I’ll be happy to help.