10+ Best Practices for Engaging Potential Investors

Last week, I wrote an article called ‘How to Update your Investors for best results’. The post set out the importance of updating your investors; and how you should go about it. I laid out a useful (hopefully!) formula for your updates. And gave you some real-world examples from fast-growth companies in my network like Sweatcoin and ScreenCloud.

The post proved more popular than I expected; a number of people have been kind enough to contact me with their thoughts. The response was positive except for one thing: I had only covered one aspect of a broader theme…

Investor Relations.

Last week’s post gave advice for the tail end of the fundraising process i.e. after investors have actually invested in your business.

But what about before they’ve invested? When you’re still trying to persuade them to do so?

Angel Investment Network connects angel investors with startups looking for funding, contacts, advisory board members etc. It would be remiss of me not to complete the picture and give advice on investor relations for the first half of the fundraising process…

Engaging Potential Investors

When interacting with people you hope to convince to invest in your company, there are 3 principal types of interaction you will have:

1. Reaching out
2. Responding
3. Reminding

In this post, you will learn the best practices for each type of interaction.

I’ve been helping people do this for a long time now. I’ve seen some hilarious but tragic examples of how not to do it! But more importantly, I’ve built up a picture of the best approaches. I hope this article means that you or anyone you share it with can avoid the common conversation-ending mistakes.

The aim is to help you generate more leads, and convert a higher percentage into investors.

Reaching Out

To be clear, this section does not deal with how to find investors. That’s a different question for another time. You can find some ideas here though.
reaching out to investors

But assuming you’ve identified and acquired the contact details of potential investors, how do you go about approaching them?

Reaching out to potential investors is a tricky business. People hate cold approaches. Even if your company is the next big thing, people have a strong aversion to being hailed from out of the blue. A stranger danger thing perhaps. But get the tone and hook just right though, and you can overcome this aversion.

How?

The key is to keep the email short. Value is king. People want to understand it quickly. If they see huge chunks of text in an initial email, they will be put off before even reading.

At the same time, if you shorten your email but lose the articulation of your value proposition. Then the hook is gone.

So, while moderating the length, you need keep your sights on the purpose of the message. The ability to do this ultimately comes down to being able to pitch your venture clearly and concisely.

This is crucial. The purpose of the email is not to explain the whole idea. It’s to hook the contact into wanting to know more. Once you’ve engaged them, you can dive into the detail.

The question you need to ask yourself is:

“What is the most attractive thing about my business likely to be for this potential investor?”

If you can answer this, then you can frame your message around it.

What are some good hooks?

– Introductions – if you can be introduced by someone they trust and know, your chances of engagement increase dramatically

– Relevant & large market opportunity

– Trending topics e.g. AI, Blockchain, Machine learning (obviously not always applicable but check this out!)

– Impressive traction e.g. funds raised, key partnerships, big-deal advisors

– Problem/solution articulation – can work for early-stage projects but is risky because they might not see the problem as you do

Beware, there are also some “anti-hooks”!

A contact of mine was approaching a VC company in London. He made the mistake of asking for an NDA. They never replied. Annoyed, he ACTUALLY walked into their offices and asked why he never got a response. They explained the NDA turn off and sent him on his way. (More on this next week).

Summary:

Keep it short and make sure your hook is clear.

End with a call-to-action. This gives them a framework to respond. At this stage, the most likely example is:
“Can I send you some more info? I’d love to get your feedback.”

Responding

This interaction is particularly important to anyone raising via the Angel Investment Network platform. On the platform, an entrepreneur submits a pitch using the template and onscreen instructions which is listed and sent to the network of angel investors. Interested investors can then click to connect. It’s at this point only that the entrepreneur can message an investor. So, there’s a lot riding on the response!

That said, this advice goes for any time you receive a message/email from an investor whether they are reaching out or responding to you.

What should you do then?
appropriate response to investors

The advice is dead simple. But you’d be amazed how often I see people do the opposite.

– Respond promptly (24-48 hours)
Quick responses make investors feel important. They also show that you are professional and organised.

– Avoid spelling and grammar errors
Duh!

– Make sure you address every point they make
You’ll leave a bad impression if you don’t have a considered response to address every issue they raise.

– Avoid blocks of text
Blocks are boring. And not easy to digest. Address questions/points they make with bullet points or numbering.

– End with a call-to-action
This gives them a framework for responding and will increase the chances that they do.

This advice seems so trivial that it pains me to write it (the first 3 in particular). But I’ve seen it go wrong too many times through haste, laziness and even stupidity.

Last year, I watched the final night of a play written by a friend. At the party afterwards, I was talking to one of the actors. During the performance we had all remarked on his incredibly muscular physique – the man was a monstrous! I asked him ‘why’.

“Why so much gym?”

His response impressed me. And can be applied to this situation and many others.

He said;

“Control the things you can control.”

In his case, he realised that one of the reasons he didn’t get every part he auditioned for was because he was out of shape. But more importantly, he realised that this was an aspect of his life and attitude that he could directly address. And as a result, he would optimise his chances of getting great roles. (I’m afraid I can’t say who he is!)

So, to optimise your chances, ‘control the things you can control’.

Remember this interaction with investors is a bit like an audition. The reality of it is that investors don’t have much time to judge you. Their impression of you will be created over the course of a few emails, a call and perhaps a coffee.

When deciding to invest a considerable sum of money in someone, that’s not a lot to go on!

So, in the small window of opportunity you are given to make an impression, ensure that what can be polished is polished. That way, you’ve given yourself the best chance.

Reminding

So, you reached out to an investor, they responded, you exchanged a few emails discussing the venture, it all seemed to be going so well. But now they’ve gone dead. No response to your last message. Cue tumbleweed and depression…

What can you do?

The first thing to remember is that in most cases, any investor worth having is going to be very busy.

So, you should never take it personally if you don’t get a response for a while. You don’t know what’s happening at the other end. They may be taking the time to carry out proper due diligence and discussions with various people before pushing ahead.

There is no sense fretting and waiting for a response. It may never come. In which case, you’ve wasted valuable time worrying about it. Equally, it may come. In which case, you’ve also wasted time.

That said, you shouldn’t wait indefinitely. It is perfectly acceptable to nudge people to respond.

But how do you do it without royally p***ing them off?!

Time is important. DO NOT nudge anyone if they haven’t responded after 3 days. (Unless they specifically asked you to).

7-10 days is an acceptable interlude. But longer is fine too. I was helping someone raise money once: we actually met the investor face-to-face before pitching anything as we had been connected via a strong introduction. He then said he would follow up via email after he had had time to think.

We waited 29 days and had given up all hope when his email finally came through. It was a positive one too!

What about the content of a reminder?

This will vary according to time and circumstance. But there is an optimal approach.

Consider:
a)

“Hi X,

Did you have any more thoughts about our project?

Thanks,
Founder Y”

b)

“Hi X,

It’s been a good few [insert time period] since we last spoke.

We are showing strong growth across the following key metrics: [insert impressive figures].

Also, [insert Mr/Mrs Big Deal] has committed £X and joined the advisory board.

Did you have any more thoughts about our project?

Thanks,
Founder Y”

Sometimes approach a) may be appropriate. But most of the time, b) will be better.

The reason for this is momentum.

This builds on the ‘hook’ idea we looked out when discussing reaching out to investors. You have to give them some incentive to respond. Hack their desire to engage with you.

At this stage of the process, you can do this by the impression of momentum. By updating them on your good progress, you can make them feel like the opportunity is a train leaving the station. Without them.
investors missing the train

Fear of missing out is a strong psychological influence to tap into. No investor wants your business to be the one that got away. So, make them feel like it is getting away with positive updates in your reminders. You should find an uplift in engagement.

That’s all folks! Thanks for reading.

Tweet me () if you think I missed something etc…

Or get me on oliver@angelinvestmentnetwork.co.uk

How to Update Your Investors for best results

Investor Updates: Why? How? When?

What you’ll get from this post:

  • 1. Why you should update your investors
  • 2. A template for great updates
  • 3. Example updates from fast-growth companies like Sweatcoin and ScreenCloud

“We connect entrepreneurs and angel investors.”

That’s our tagline at Angel Investment Network. We’ve been doing it for 14 years so it makes sense! We help make the initial connection that results in feedback, meetings and often investment. Startups get the funding they require. Investors get access to great and diverse deal flow.

But as a result of this, most of our advice and guidance focuses on the early part of the fundraising journey: how to meet investors, how to value your idea, how to find great deal flow, how to invest etc…

This is useful (we hope!). But only as far as it goes. There’s a danger this gives the impression that the relationship between entrepreneur and investor only needs to be fostered at the very start.

This is not true, of course.

Why?

Investor = Evangelist

Any investor in your company can be an evangelist. And an important one. The best investors are not those who sit silently hoping their portfolio grows. They are the people who bring to bear all their resources to help their companies grow. But there is no guarantee they will always do this just because they invested.

It’s down to you to keep them engaged. Your updates will give them the inclination and the material to shout about you to their network.

Investor = Wise

Sure, you wanted investors for their cash. But if that was all you wanted from them, it was short-sighted. It’s a truism about angel investors that they bring more to the table than money. A good angel will have a wealth of experience in business and hopefully your sector.

But they are busy people with active interests all over the place. You’ll only get their attention if you engage them enough to deserve it.

So, let them be a light for you when all other lights go out.

Investor = Capital Mine

Some businesses only need one funding round. Some businesses go through many as part of their growth strategy. It’s not always clear which business yours will be. But it would be naive to think that you’ll never do another round.

And who are likely to be your hottest leads for later rounds?

Your existing investors of course!

They will want to avoid dilution and help the company in which they’ve invested grow. Additionally, they will want to bring on more people to invest. It’s in their interest, after all, to support the company in its growth.

That said, there’s no guarantee they will want to invest more or bring their friends on board. If you haven’t fostered the relationship and kept the excitement burning, they may want to cut their losses.

But, if you’ve kept them sweet with exciting updates, they’ll be champing at the bit to buy in and involve their network.

Finally…

It’s good business practice to update your shareholders regularly. (Once a month is optimal and what the companies in my examples below go for). Good habits breed good habits. The more you force yourself to go through the motions of running a business properly, the more ably you will run the business, until it’s second nature. And, all of a sudden, you’re a business leader.

investor update

So, how then should you update investors?

It’s quite easy really. There’s a formula you can follow each time. Just have the relevant info ready for each section and input when your update is due:

Intro:

Open with some positive statement about the exciting times the company has been going through since the last update. This should set the tone of the email.

Overview/Highlights:

Investors are almost always busy people. There is no guarantee that they will read your whole email. In this overview, give the main points you want to put across. This should give them enough info to feel enthused about you and their investment without having to read more. It also serves a secondary purpose – it should entice them to read the rest of the email!

e.g.
– Revenue is up XX%
– New Product ABC is in the final testing phases. Watch this space.
– We closed two new major partnerships with Huge Brand X & Huge Brand Y.
– Big Deal XY joined the team/board. He/she will….

Key Metrics:

Your key metrics are the figures that show your concept works. They are the essential validation on which investor confidence hangs.
These figures will differ from company to company, but your presentation of them is the same.

e.g.
We’ve seen impressive momentum across our key metrics. KPI 1 has grown XX% month-to-month. KPI 2 has grown XX% month-to-month. We are on course for a huge {insert current month}.

This information can be displayed in a graph. Hopefully, one that looks like this:

update graph

Fundraising:

If you’re raising money, give details. You may want to indicate the impressive people/funds you are in talks with; and how far advanced the talks are.

You can also include your latest deck as an attachment. And invite them to take a look. Don’t forget to engage them directly by asking for feedback or to share with any contact who may be interested.

Learnings:

Investors may also be interested in your personal growth as a management team. So, details of any findings from tests, campaigns and product launches will make interesting reading. They may also encourage investors to give advice.

Team:

If someone on the team has had a big impact, you could shout about it here. The employee will thank you for it! It also adds to the general impression of accomplishment and progress you should be conveying throughout the whole email.

a-team_logo update

Future:

What are the plans, challenges and targets for the next period? Keeping the goals of the company in front of your investors is a great way to keep them aligned with your interests. And it will demonstrate that their investment is in competent hands.

Don’t hold back from requesting advice on any of the challenges ahead. Delve into the acumen of your investors and all the while keep them engaged.

There you have it. An important task fulfilled with minimal hassle.

It’s important to note that this formula is not prescriptive. Only mention sections that are relevant. There may be sections specific to you that you want to add too.

These emails do not have to be long (more on this in the examples below). Short and sweet will suit investors. But make sure you cover the essential details so investors don’t feel shortchanged.

There is no excuse. And, as we’ve seen, the upsides are huge.

Some Real-world Example Updates

This update from Sweatcoin is a masterclass in keeping it ‘short and sweet’. No bluster. No fluff. Just hard traction. It’s easy for them because they are growing so fast (they’ve added another million users in the last month!).

(Make sure you zoom to 90% or so to read it clearly).

Click to view Sweatcoin investor update

ScreenCloud’s is a longer piece which follows our update template more closely, making good use of HTML to give clear structure. Note how they give that important overview section for those who don’t read long emails!

Click to view ScreenCloud Investor Update

It’s worth saying that both companies do a good job of creating a sense of excitement and progress. They go about it in different ways, perhaps due to time constraints and what they find manageable. The point is that the info and the impression put across in both is excellent.

N.B. All this advice works as a template for keeping prospective investors interested; and investors you never closed too – make them feel like they missed out!

That’s all for now. Hope you found this useful!

Sceptic to Champion: Air Ticket Arena on Angel Investment Network

Fundraising on Angel Investment Network – A User Story:

Kresimir Budinski first reached out to me through LinkedIn. He is the founder of Air Ticket Arena – the first fully-automated platform allowing passengers to bid for unsold seats on scheduled flights; and helping airlines to recuperate some of the £120 billion in lost sales each year through unsold seats.

He recently closed a £350,000 of seed fundraising through Angel Investment Network.

Kresimir, or ‘The Bishop’, as he is affectionately known by his team, complimented me on my article about SEIS & EIS Tax relief. He had apparently used it as an explainer throughout his fundraising. Both for investors he had found through Angel Investment Network and other channels.

I thanked him and wished him luck with the fundraising. And we left it at that.

Messages like this are relatively frequent (depending on the quality of my article!). So I didn’t think any more of it.

But I was to hear a lot more from Kresimir and the story behind his fundraising. A few months later, pleased with his progress (now overfunding), he shared his fundraising experiences with me in full. It struck such a chord that I had to share the story.

It’s a tale of how courage through scepticism can bring great opportunity. And it’s a useful case study for anyone considering looking for investors on the Angel Investment Network platform, and more importantly, for anyone fundraising in general.

So, in the charismatic words of their Head of Marketing Grgomir ‘George’ Garić, the story of Air Ticket Arena’s fundraising journey from intense initial scepticism to success….

Air ticket arena fundraising

Part 1: Fundraising Scepticism

I had always considered investors a type of mythical creature, living somewhere in a distant fantasy land, creasing themselves with derisive laughter at most investment proposals. By investors, I mean real investors who can offer advice as well as capital. Not just people who masquerade as investors because they have a bit of cash.

Of course, I had heard about the likes of Facebook, Uber, Airbnb, and hundreds of other projects backed by investors – but I had never met anyone who would actually boost my bank account.

Except for my wife, of course.

In my life before Air Ticket Arena, I had met many who claimed to be investors. But few of them understood the symbiosis required between entrepreneur and investor to make a partnership mutually motivating. The interaction between idea and capital needs to be good for both the idea and the capital. The idea needs to grow and so does the value of the capital.

Too many investors wanted to buy into projects at way below the value of the idea and all the preceding hard work. They refused to realise that this was not optimal for the business and therefore not optimal for their investment.

Given these early experiences with “investors”, my approach to any kind of investor was always going to be like visiting an 18th-century dentist. Suspicious in the extreme.

Part 2: Misplaced Hope

So, when I started working on Air Ticket Arena and Kresimir, suggested fundraising our seed round through Angel Investment Network. I thought it was the beginning of the end.

I sincerely believed that Angel Investment Network, despite their 13-year history and impressive track record, was just another portal where anyone – even my mother – could masquerade as an investor.

So why did we go with them?

Sometime in 2009, a seemingly beautiful thing happened. Kickstarter kickstarted. This was the first time I had heard about crowdfunding.

The theory seemed inspired to me. This was a real innovation in the investment scene which promised a more efficient process for both investors and entrepreneurs. And promised to harness the power of the crowd with all the social proof that can bring.

Then equity crowdfunding platforms like Crowdcube and Seedrs emerged. Icing on the cake. Or so I thought.
Fundraising through crowdfunding

I had heard complaints about these platforms from founders who had tried them. But I dismissed them as over-fussy.

When Kresimir asked me to prepare a crowdfunding campaign on Crowdcube for Air Ticket Arena, it was a joyous occasion and I dove into the work with relish.

We prepared almost everything for the campaign and then one week before the launch, Crowdcube refused us. Their reason? We didn’t have a high street bank account. Right.

Not to be deterred, we immediately approached Seedrs hoping to re-purpose the material we had put so much effort into for the Crowdcube campaign. After a 15-minute call, they claimed that our valuation was too high to run.

My high hopes were thoroughly misplaced and I found myself floundering in a sense of gloom about the prospects of fundraising. Not simply for myself, but also for other regular people who do not have access to investors through their personal network.

It was in this state of despondency that Kresimir insisted we chance our hand on Angel Investment Network. You can imagine my reaction.

I already considered this platform inferior to the likes of Crowdcube and Seedrs who had just thoroughly disappointed me.

Thus, it was without much hope and intense reluctance that I agreed to create a pitch on Angel Investment network…

Part 3: Faith Rewarded

fundraising

Six months later, we have raised £350,000 and filled our seed round. The strength of the discussions means that we are now overfunding as I write this.

At this point, while we enjoy the security of fundraising mission accomplished and while the experience is still fresh in our minds, I thought it might be helpful to share some key findings from our campaign on Angel Investment Network.

– Are the investors active and real?

Most of the investors we spoke to were active and engaged in the investment community and had the capital to invest. Even those investors who did not ultimately invest provided useful feedback for us with which we were able to improve our pitch and even our business. The platform also monitors the activity of investor users. Anyone suspicious is removed pending investigation.

– How can I tell if an investor is really interested?

It will be straightforward to identify investors who are seriously interested. They will have read your pitch in detail and will ask the most pertinent questions so will stand out from the others.
It is also very important to do your own due diligence of any investor contact – you can be sure they’ll be doing it on you. So, don’t be afraid to ask people to identify themselves if their profile is not clear.

– How can I keep prospective investors interested?

When you are happy that a prospective investor’s interest is genuine, engage in dialogue with them in a clear manner. Your job is to clarify what you have written in your deck. Keep focused on it. Try to also give the impression of progress and momentum – update investors you’ve not heard back from as well as ones you actively talking to.

– What should I say about valuation?

Avoid any talk about valuations after a one-minute talk or a first email response. Send an investment package and give them up to a week to investigate the opportunity. An excellent counter-question is to ask them how much they want to earn? None of them gave us an exact answer.
When you do come to declare your valuation make sure that your reasons for it are clear and grounded in the reality of the space in which you are operating.

– What sort of investors should I aim for?

Expect that your investors will more likely be from a similar industry to your project. If it is a project from the travel industry, then more than likely the investors will come from the travel industry. These investors will certainly be most helpful to you. However, there are many investors who are interested in investing in an area but are not necessarily experts e.g. Bankers interested in AI. So be prepared for this too.

– Do I need to have all the legal stuff prepared?

Make a clear legal pathway for investors who make you an offer of investment. Your investment contracts need to prepared and ready to send. An offer is never really finalised until all the forms are signed and the money is in your account, so you don’t want to have any delay in sending over the necessary documents when an investor declares an offer.

– How much effort is required?

Prepare to invest time and some money to ensure your pitch is as good as possible and that it gets the exposure it needs to raise the capital you need.

To be successful your pitch needs to be excellent and you need to market it well. We wrote 50+ articles explaining our concept from a variety of angles which we shared across social media channels. Angel Investment Network were very willing to re-share these posts which helped to create a buzz.

What I want people to understand from our story is that anyone with a good idea can raise money from angel investors. It requires dedication and hard work, but so does running a successful business!

At this point, on behalf of the whole team at Angel Investment Network, I’d like to thank Kresimir, George and the guys at Air Ticket Arena for taking the time to share this. All the best with the business!

Want to know more about Air Ticket Arena?

Check out their explainer video below:

Want to share your experience on Angel Investment Network and get featured as part of this user story series?

Please contact me on oliver@angelinvestmentnetwork.co.uk or on Twitter

Video Interview: What’s the difference between Angel Investors and VCs?

The difference between angel investors and venture capital firms always seems to confuse entrepreneurs.

In truth, the difference is fairly clear-cut.

Who are they? What do they look for? How can they help? How much are they likely to invest? These are all key differentiators.

As an entrepreneur looking for funding, it’s important to understand these differences. Your choice of who to approach and when could have a significant effect on the efficiency of your round.

Xavier Ballester, the co-director of Angel Investment Network’s brokerage division, explains more in this recent interview. He’s talking to our friends at Linear, a specialist prime broker and award-winning hedge fund incubator based in London and Hamburg.

Enjoy!

Prefer to digest your content in written format?

I wrote an article on the topic for Angel Investment Network’s Learn centre. You can read it by clicking here.

How do investors evaluate startup pitches?

An angel investor’s task is to predict the potential of a company based on early indications and very little else. There is no infallible process for doing this. This is the risk investors face; and the fear they must overcome to invest. Only then can they give themselves a shot at the returns available from a shrewd investment.

Your task as an entrepreneur seeking finance is to mitigate and alleviate that sense of fear and so lower each investor’s risk threshold. The two basic ways of doing this are:

1 – Demonstrate that the perceived risks are smaller or more easily overcome that they initially appear.

2 – Set out a credible vision for the success of the business such that the returns outweigh the risk.

This, you might argue, is easier said than done. And you’d be right.

In my experience, entrepreneurs who understand how investors assess deals, find it easiest to raise money. It’s part of the reason why people who’ve raised money before find it easier to do it again.

SO THIS BEGS THE QUESTION, HOW DO INVESTORS EVALUATE STARTUP DEALS?

As I touch on above, this is a hard thing to get right for investors – a company may tick all the boxes, but still fail down the line. But this is often a matter of luck and down to factors beyond the investors’ control.

In their evaluation steps, investors can take measures to ensure that the companies they do go into have the best chances of success.

So here’s a simple evaluation framework that we recommend to investors on Angel Investment Network. We base this on our own experience from 12 years’ hand-selecting startups for our brokerage division. Companies we’ve worked on include: SuperAwesome, SimbaSleep, Novastone, What3Words, Opun and Cornerstone.

Two of these were just named in the Independent’s Top 10 startups 2017.

A SIMPLE EVALUATION FRAMEWORK:

1. TEAM

A team for inestors

We interviewed Jos Evans who has made a number of successful investments through us. Jos gave the following advice:

“Everything comes down to the quality of the founders. If the people are excellent they will succeed regardless of whether the initial business idea works. Meet as many people as possible and cross check your network for people who might know the founders of a company you are considering investing in.”

This is sound advice from someone who is making a career from angel investing.

It is the people behind a company led by the founders and validated by their advisory board that will optimise its chances of success. If the founders are relentlessly resourceful they will find the iteration that makes the company a winner.

In their due diligence, investors spend a long time researching the founders’ backgrounds. They also often try to spend time with them on the phone and, if possible, in person. The qualities that come across go a long way to giving investors confidence and lowering their risk threshold.

Similarly, the strength of the company’s advisory board can be a very strong index of potential:

1 – It reflects well on the founders if they have managed to persuade impressive people to back them.

2 – The fact that impressive advisers have backed the idea lends credibility and validation to it.

3 – The financial and social clout of high- profile board members means that the idea will struggle to fail. propelled on by a strong support network, companies tend to find a way.

2. MARKET

Which is the more significant indicator of success – the team or the idea/market? This is an ongoing debate between investors.

Renowned US investor, Ron Conway, believes, like Jos, that the team are the foundation. The idea is liable to change, but the team’s motivation, talent and competence will remain to drive the project to success.

Other investors argue that great founders in a bad market are far less likely to succeed than bad founders in a great market.

But to polarise these two points of view misses the point a bit. Good founders will find good markets – otherwise they are not really good founders.

So, in your pitching docs you need to make sure you give clear details on the market opportunity. Are you pitching a scalable opportunity in a market of sufficient size and growth trajectory? And are you doing it at the right time?

Here is the advice we give to investors when they evaluate the market section of a pitch:

“…you want to research the market to ensure the opportunity is or will be as large as the founders claim. If your findings confirm theirs then you can feel comfortable that a) there is a significant market and b) the founders know what they’re on about!”

Remember, your pitch/business is as representative of you as you are of it. In trying to sell your pitch to investors you need to sell yourself and vice versa.

3. TRACTION

Investors want a startup investment to have as much real world proof of concept as possible.

What better way to give confidence? If you can exhibit positive feedback, high user retention, growing revenues, etc at an early stage, it proves the venture (as far as possible!).

The more traction a company has, the more ‘proven’ it appears and thus the less likely it seems that it will fail. When we remember that persuading investors is about lowering their risk threshold, it’s clear how important traction points are. Traction points instil confidence in the vision and its execution.

They are as close to evidence as an early-stage startup is likely to get.

An obvious concern for early-stage companies is that they feel they may lack traction. They are especially likely to feel this way if they are not generating revenue.

So what constitutes traction?

Traction is anything that validates your business. This will depend on the business: sometimes it will be revenue; sometimes it will be downloads or subscribers; sometimes it will be page views or awards.

In their efforts to provide traction points for their startup, entrepreneurs often make the mistake of relying on ‘vanity metrics’. For instance, an app may have had 100,000 downloads in its first month. But if 97% of those users never use the app again, the initial metric flatters to deceive. Most investors will work this out very quickly.

So the traction points you choose must actually prove the value of your business or they will undermine your pitch.

The best way to think about this, I have found, is to work out what your North Star Metric is. North Star Metric is a term coined by Growth Hackers to describe the one authentic value which shows that the business is doing what it set out to do.

4. IDEA

The points above help qualify the idea itself as valid. But we should not underestimate the effect of gut feeling when it comes to an investor’s initial assessment of an idea.

The timeless human fondness for the ego means that an initial gut feeling can have a powerful effect on the ultimate evaluation of the investor.

If an investor feels that an idea is good, they want to be proved right.idea for investors

So when an investor first reads about an idea, if they think it is a real solution to a real problem in a real market, they are likely to pursue the opportunity. They want to vindicate their instinct.

This is a classic example of cognitive bias. This is the term used in psychology to describe when it is hard to undo your initial judgment because your brain will keep finding evidence to support that judgement.

It’s why the hotel industry focuses so hard on the initial impression it creates in the lobby. If the atmosphere and décor feel high-end and luxurious and you are handed a complimentary glass of champagne, your whole stay will be filtered through the lens of this initial assessment. If the lobby is grubby, your bias will lean in the opposite direction.

This can be capitalised on by entrepreneurs. When you set out what your business actually does, do so in such a way that plays up to this bias. Make a clear and powerful first impression.

How?

The visual impression of the design of your pitch deck is very important. But so is the clear articulation of your value proposition.

We tell investors to assess whether the business is offering a real solution to a real problem. So, entrepreneurs should set out their idea using this ‘Problem/Solution framework’.

Here’s a quick example of what I could write for Angel Investment Network:

Problem: The startup industry is huge, but access to finance and investors remains difficult for entrepreneurs…

Solution: Angel Investment Network’s platform connects entrepreneurs with 130,000+ angel investors from around the world so that they can realise their potential and grow a lucrative and successful company….

The principal value of the service comes across clearly and concisely.

5. WHAT DO OTHER INVESTORS SAY?

We have seen how the advisory board can be considered a metric of sorts for future success. It follows from this that other investors can be invaluable sources of insight.

Many investors say it takes away a lot of the stress if you can share the experience. That’s why syndicates, both official ones and groups of like-minded friends, are so popular. Others may have spotted some key index of potential (success or failure) that one investor on their own may have missed.

If you already have investors on board, it is, therefore, a good idea to ask them if you can share their contact details with prospective investors.

This transparency is likely to give investors confidence in you. And allow them to allay any fears they may have by talking to people who have already invested. One caveat to this is that a prospective investor may point out a flaw that the existing investor may have overlooked!

Summary

There are many factors that any individual investor may take into account when they evaluate an opportunity. This article has aimed to cover the most general and universally useful for entrepreneurs.

But you should expect each new conversation to be different. Every prospective investor wants to see whether you are a good fit for their personal investment agenda.

On that note, it is worth saying that you should never take it personally when someone decides not to invest. It is a) a huge waste of emotional energy and b) pointless. There are so many reasons why someone may choose not to invest. One of our entrepreneurs once became despondent because a good investor had withdrawn. Little did they know it was because of a divorce!

Rejection is also a good opportunity to get candid and constructive feedback from people with real expertise – sometimes what hurts the most is the most useful in the long run.

I originally wrote this article for Toucan.co blog. It was well received so I thought I would share it again.

SEIS and EIS Tax Relief Explained with a little help from Star Wars…

SEIS and EIS are the given acronyms for the generous tax breaks the UK government offers to investors in startup companies. (Seed) Enterprise Investment Scheme. The company must be UK registered and meet certain eligibility requirements. Eligibility is a great way to incentivize investors because it reduces their risk. Dramatically.

As it’s May the 4th. As in May the Fourth be with you. As in Star Wars Day. I thought it appropriate to share an article I wrote explaining the benefits of SEIS and EIS with a few lame Star Wars puns thrown in. You know, to keep it, well, Light.

**This article is relevant for companies registered in the UK only. However, companies registered outside of the UK may find it useful as there may be similar tax breaks offered by their local government.**

What are SEIS & EIS Tax breaks?

Investing in startup companies is generally much riskier than buying shares in much larger more established companies, although the returns are potentially much larger. As a means of offsetting this risk for investors and thereby incentivising them to invest, the UK government offers two attractive tax breaks known as SEIS and EIS (the Seed Enterprise Investment Scheme; and its parent the Enterprise Investment Scheme).

The tax breaks are very generous to investors and have been instrumental in helping the startup industry grow in the UK. As a result, investors now place high value on companies that have qualified for SEIS & EIS.

Because of this, we recommend that all UK companies raising through our platform seek ‘advanced assurance’ for SEIS/EIS if they think they will qualify. As a general rule, if you consider your company early stage then you probably qualify for both, or at least EIS.

What’s SEIS?

HMRC gives the following overview:

“…[SEIS] is designed to help small, early-stage companies raise equity finance by offering tax reliefs to individual investors who purchase new shares in those companies.”

Startups who qualify will be eligible to offer up to £150,000 in SEIS shares to investors.

What are the principal benefits for investors?

  • SEIS is incredibly generous and investors will get 50% tax relief per tax year on investments up to £100,000. (Relief is given each year, but the shares must be held for at least 3 years)
  • Investors will also get Capital gains exemption on the disposal of assets
  • There is a ‘carry back’ facility which allows investors to treat shares as if they were acquired in the previous tax year. Hence the relief can be claimed for the tax year before the investment.

Example:

Angel Investor Skywalker invests £100,000 into ‘Force for Good’, a ground-breaking social enterprise startup which qualifies for SEIS. For the given tax year, Skywalker has a tax liability of £50,000. Because of his SEIS shares he gets 50% of the value of his investment in relief, so £50,000.

This means he pays £0 in tax rather than the £50,000 he owes in tax. This situation is irrespective of how well the company does.

If the company does well, Skywalker would also qualify for exemption from Capital Gains tax (up to £100,000) on the profit provided it is reinvested.

If the company folds, Skywalker will still receive his £50,000 in tax relief meaning only half his initial investment of £100,000 is at risk. When the company folds, he will also be given loss relief of 45% of the ‘at risk’ capital. 45% of £50,000 is £22,500.

So if the company folds, Skywalker will only have lost £27,500 even though he invested £100,000. That’s relief of 72.5%!
SEIS

Does your company qualify?

N.B. These tax breaks are only available to UK based companies; investors do not need to be UK resident but must have some UK tax liability against which to set the tax relief.

For a company to qualify for the SEIS scheme it must meet a number of qualification tests. The list below is not comprehensive as the rules in place are often quite detailed and nuanced, but it gives a helpful, broad picture:

  • Permanent UK Base- your company must have a permanent UK office or the owner must be a UK resident. This must remain the case for three years from when SEIS shares are issued.
  • Your company must not be listed on the stock exchange at the time the SEIS shares are issued.
  • Your company must have fewer than 25 full-time employees at the time the SEIS shares are issued.
  • The gross assets must not exceed £200k at the time the SEIS shares are issued.
  • Your company must be early stage in that it must not be continuing a trade that is more than two years old at the time the SEIS shares are issued.
  • Your company must not have raised money through EIS or VCT schemes in the three years prior to the SEIS share issue.
  • The funds raised must be spent within three years.
  • Your company must be independent i.e. it must not be controlled by any other company or anyone associated with that company.
  • Your company must not be a member of a partnership

To get formal approval of SEIS eligibility you need to fill out an SEIS1 form and send it to HMRC. Download the form and the notes here.

EIS

What’s EIS?

EIS is the parent of SEIS. The principle is the same – to encourage investors to invest in early stage companies by offering them a generous tax break based on the sum they invest.

When the scheme was launched in 1993 the then Chief Secretary to the Treasury, Michael Portillo, said;

“The purpose of Enterprise Investment Schemes is to recognise that unquoted trading companies can often face considerable difficulties in realising relatively small amounts of share capital. The new scheme is intended to provide a well-targeted means for some of those problems to be overcome.”

EIS is less generous in terms of relief but it is easier for companies to qualify for and there is a larger quota available for eligible companies to offer investors. 

Startups are able to offer up to £2,000,000 in EIS shares.

What are the benefits for investors?

  • Can invest up to £1,000,000 a year in EIS shares.
  • Investors will get 30% tax relief per tax year
  • Any gain is exempt from Capital Gains tax provided the shares have been held for at least 3 years.
  • Loss relief via tax liability upon disposal of shares for a loss
  • Capital gains tax on assets can be deferred if the gain is re-invested in EIS shares
  • ‘Carry back’ facility so the shares can act as tax relief for the previous tax year

Example:

Angel Investor Vader invests £100,000 into ‘Death Star Inc’, a highly disruptive Fintech startup which qualifies for EIS. 

For the given tax year, Vader has a tax liability of £50,000. Because of his EIS shares he gets 30% of the value of his investment in relief, so £30,000. This means he pays £20,000 in tax rather than the £50,000 he owes in tax. This situation is irrespective of how well the company does.

If the company folds, Vader will still receive his £30,000 in tax relief meaning only £70,000 of his initial investment is at risk. When the company folds, he will also be given loss relief of 45% of the ‘at risk’ capital. 45% of £70,000 is £31,500.

So if the company folds, Vader will only have lost £38,500 even though he invested £100,000. That’s relief of 61.5%!

Does your company qualify?

To qualify for EIS your company must satisfy the following criteria:

  • Permanent UK Base- your company must have a permanent UK office or the owner must be a UK resident. This must remain the case for three years from when EIS shares are issued.
  • Your company must not be listed on the stock exchange at the time the EIS shares are issued.
  • Your company must have fewer than 250 full-time employees at the time the EIS shares are issued.
  • The gross assets must not exceed £15 million at the time the EIS shares are issued.
  • The funds raised must be spent within three years.
  • Your company must be independent i.e. it must not be controlled by any other company or anyone associated with that company.
  • Your company must not be a member of a partnership

The full criteria and guidance on how to apply for advanced assurance can be found here on the HMRC website here.

SEIS-EIS

Summary:

If you’re an early stage company registered in the UK and you’re raising money, you really should get advanced assurance for both SEIS and EIS. It can seem a little complicated, but in effect, all you need to do is submit the correct forms to HMRC and let them work out if you qualify.

You can be sure that all your competitors will be doing it – investors are far more likely to invest in an early stage company if they have the guaranteed risk mitigation that SEIS and EIS offer.

This article was originally written by Oliver Jones for Angel Investment Network‘s Learn centre. You can view the original and other similar articles covering all topics related to startup fundraising and investment here.

What’s the outlook for mobile app startups and investors in 2017?

“There’s an app for that”, or some variant of the phrase, is now one of the most common responses to anyone raising a complaint or bemoaning a problem, however small.

Rise and fall of man

The extreme sense of entitlement coupled with the profound idleness that characterises our age has created a market for apps which manage or assist with our dry-cleaning, our sex life, our tampon subscription, our polyphasic sleep-mapping, our pets’ bowel movements…I wouldn’t be surprised if somewhere in the murky depths of the App Store there’s an app for communing with the dead – or perhaps I’ve just been watching too much Black Mirror.

The last decade has seen the rapid and unstoppable emergence of the mobile application. And it’s not just quick-on-the-uptake millennials who are enamoured with this new way of being, by now nearly everyone is a smartphone-toting app addict.

But is this set to last? And what’s the outlook for mobile app entrepreneurs and investors?

The general consensus from anecdotal reports is that mobile app companies are finding it more difficult to raise finance. This requires some unpacking. Thanks to a report from our friends at Beauhurst, who track the funds raised by thousands of seed, venture and growth-stage companies, we can see that the amount invested in mobile apps in the UK reached its highest ever level of just over £560m in 2016 (that’s up from £67m in 2011 and circa £275m in 2015).

Mobile app deal numbers and amount invested 2011-2016
Mobile app deal numbers and amount invested 2011-2016

So what’s the problem? Clearly, there are enormous (and increasing) amounts of capital still being ploughed into the app industry by investors. But hold on, there’s a nuance to this.

The crucial change which gives credence to the consensus is that the stage of the app companies raising money has changed. In 2013, 70% of app companies who raised money were seed stage, but by 2016 that number had dropped to 62% with more investors opting for the more proven venture and growth-stage companies.

So from this, we can see that for early stage app companies the prospect of raising finance has indeed become marginally harder. However, the amounts being invested into the sector are still growing at an impressive rate so for apps good enough to compete, there’s still a world of opportunity.

With thanks to Beauhurst for permission to use their data. You can read their article here

Latest Success Story: Repairly get their investment fix

Repairly is one of the latest company’s to come off Angel Investment Network’s funding line. The company is now gunning to fix the technology repair industry having closed a £265,000 seed round.

Repairly is disrupting the billion-dollar technology repair services industry by offering collection and delivery on broken tech. Their mission is to make it ridiculously simple to get your phone, tablet or laptop repaired.

Repairly 3

The introduction of Repairly means that people no longer have to go to the expensive Apple Store or inconvenient corner shops – customers don’t even have to leave their desk. Repairly collect, repair and return within an average of 2 hours and 6 minutes.

Fraser Williams, co-founder and CEO at Repairly, says: “Over 32,000 phones get broken everyday in the UK alone. People don’t know where to turn when this happens. Repairly turns people’s negative experience into a positive one, and if you can find delight in a phone repair, you can find it anywhere.”

Richard Edwards, the other co-founder, says: “We ensure busy people with broken technology are back up and running as soon as possible…We saw how much technology had advanced but the support for that technology was lagging behind. People were waiting for up to 2 weeks without their phone. That seems crazy in today’s technology-reliant society.”

The business was started in 2015 after Fraser Williams dropped out of University. Richard Edwards was an early team member of the online cleaning marketplace, Hassle.com, which was acquired by Rocket Internet in July 2015.

Repairly is a graduate of the UK accelerator programme Virgin Media Techstars. The seed investment came from well-reputed investors including someone whose previous company, AddLive, was acquired by Snapchat, Richard Fearn, Daniel Murray (CEO, Grabble), Richard Pleeth (Ex-Google).

Richard Fearn comments: “Repairly’s business is growing quickly into a large market, with strong unit economics and great customer reviews.”

Exciting news for Repairly; and everyone prone to breaking their smartphone!

Is Growth the Best Measure of Startup Success?

Startup Growth & Traction
Growth gets a lot of attention in the startup world. A lot of attention. If you Google “startup growth“, you’ll find a plethora of articles, blog posts and tools all suggesting that growth is the most important measure of your startup.

Paul Graham, the founder of Y Combinator, asserts that “The only essential thing is growth“.

In some sense, this attention is well-deserved. But it is often misunderstood and taken out of context.

Growth is, of course, important. Growth is a telling measure of your product/service’s popularity; and, as such, strong growth metrics are invaluable when you’re trying to raise money from investors.

But growth can, and often does, flatter to deceive. And this is something both entrepreneurs and investors should be wary of.

Entrepreneurs need to be careful because “…many founders hurt their companies by focusing on growth too soon“. This is what Sam Altman, the founder of Loopt and President of Y Combinator, wrote in a recent article on the topic of growth.

His reasoning is simple: if you focus too much on early growth and not on actually building a product people love, then at some stage you will encounter the leaky bucket problem where the customers you worked hard to onboard, leave in droves ne’er to return!

But, if you focus on building a great product then you will have better customer retention and, as a result, growth should become increasingly easy as word-of-mouth spreads.

Consider the example of AirBnB who worked and iterated for years before they got the product just right; and then it spread like wildfire because people loved it.

Equally, investors need to be careful because there are often more telling metrics indicating the potential for success of a particular company. An app, for example, may have achieved 100,000 downloads in its first week, but if 95,000 of those users had stopped using the app by the second week, then the impressive early growth suddenly appears deceptive.

So there we have it. Growth should always be important, but it is also important that entrepreneurs and investors espouse a more nuanced attitude to it than believing it to be the ultimate measure of potential and success.