Raising capital from business angels and private investors isn’t as easy as some people think

There’s no question about it: Raising funding for a start-up from angel investors or venture capitalists is hard.  Some entrepreneurs seem to think that investors should be falling over each other to fund their project, but the unfortunate truth is that only a small percentage of entrepreneurs are successful in raising capital for their start-up. 

Unlike venture capitalists who invest other people’s money, angels invest their OWN money.  It’s important to put yourself in the investors’ shoes – how easily would you be persuaded to give £100,000 of your own hard-earned money to a complete stranger?  Angel investors may be willing to take on more risk than most, but it’s still a tough job to get them to write you a cheque.  Here are a few things to remember when approaching angels.

Business angels are in it to make money

You must be willing to give up some ownership or control of your business, and be able to show a significant return within 3-7 years, as well as a profitable exit strategy.  Angels invest for the same reason other people do: to make money. Investing in early stage companies is high risk, so investors expect to see high returns.

Don’t stop moving your business forward

Try to develop your business as much as you possibly can: build a prototype, interview potential clients to gauge their interest, prove the concept, get some letters of intent or pre-orders and possibly even start generating some revenue. The more traction your business has, the more attractive it will be to investors.

Build a team with experience in the right areas

Angels invest primarily in people, so you need to build an experienced management team that has industry expertise and a track record of growing and exiting businesses.  If your team lacks certain skills, try to plug these gaps before approaching investors.  If you can’t afford to hire staff, you may want to consider giving away sweat equity to make sure you have the right team in place to first make your company investable and then drive the business forward.

Be realistic about valuations

Although you may think your business has the potential to earn you and your investors millions, that’s all it has: potential.  Turning a good business idea into a profitable business is harder than most people think, and there are so many potential pitfalls – a new competitor, misspending your startup budget, hiring the wrong staff, the list goes on… Work with your accountant to build realistic numbers and a realistic valuation with clear assumptions that can be defended.

Take investors’ criticism on board

Entrepreneurs looking to raise capital for their start-up will be rejected by most of the investors they approach. Listen when potential funders reject your ideas – their criticism is the best feedback you’ll get about how to make your business more appealing to investors and increase your chances of getting funded.

 

Angel Investment Network’s Weekly Twitter Roundup

Angel Investment News

Business Plans & Pitching

Fund Raising

Marketing & Social Media

Start-Up & Entrepreneurship

 

Selling Investors the Problem and the Solution

The most important aspect of writing a business plan or pitching to angels is selling the problem your solution solves. Nobody is going to buy a solution for a problem they don’t have, which obviously means you don’t have a viable business.

The most important thing when writing a business plan or pitching to angels is selling the problem your solution solves. Nobody is going to buy a solution for a problem they don’t have, which obviously means you don’t have a viable business.

I recently saw an entrepreneur pitching for funding, and it had all the right ingredients – a slick pitch, a good PowerPoint presentation and a nice-looking website. All very impressive, except for one thing… Her business solved a problem that didn’t exist. By the end of the evening, I think even she had realised that she was onto a loser.

The pitches that get the investors most excited offer a solution to a problem they have or a problem someone they know has. An avid golfer, for example, will get very excited about a new golfing invention. Or, if an investor is listening to you thinking “My mate Bob was complaining about this last week, and I think this guy’s onto something”, you’ve got them hooked.

The best businesses evolve from an entrepreneur who finds a problem in their life or business and figures out a product or service that fixes this problem for others. However, before you spend your valuable time and money figuring out the solution, you need to find out whether:

1) Other people have the same problem you do;

2) Enough people have the problem to make a successful business.

After selling them the problem, you then need to give a quick and compelling description of the solution. Time is limited and you don’t want to bore the investors, so don’t get bogged down in the technology and technical details behind your solution. Try to keep it as simple and concise as possible and explain what your solution is and what makes it better than the competition. Is it faster, cheaper, more eco-friendly? If the investors want to know more about what makes it is faster and how you can make it cheaper, they’ll ask later.

Your pitch is meant to give an introduction or overview and a pitch – and a short one at that – to capture the attention of a potential investor. If you manage to sell them the problem and then convince them you have a valid solution, you should have them hooked.  Then you’ll have their attention for the rest of your pitch, and hopefully you’ll manage to get some business cards and line up some meetings.