How often do you get demotivated from starting a business because you lack the necessary resources? And by resources, we inevitably mean the same old’ Money.
But should you abandon the idea of becoming an entrepreneur just because you don’t have the capital?
Hell, no! If you think you have an excellent idea, the right team, and it’s the perfect timing to launch that business, do not be stopped because of cash.
You know, wherever entrepreneurs go, money follows. It can take work, you might fall many times, but at the end of the day, if you have a great product and team, money will find you.
There are a lot of people around the world looking to invest their money in businesses, for reasons such as:
- They are seeking to diversify their investments and want to have a small portion allocated to risk capital
- Are passionate about entrepreneurship
- It can be their way of giving back to humanity
- Simply do it for sport
So besides asking your family relatives or friends for money, you also have this whole bunch of people that has a lot of cash and is looking to invest.
Now, this universe is called Venture Capital, as you might already know, but today we should focus on one of the Venture Capital’s arm which is called Business Angels, because these might be the fellows that will, in fact, help you to set up your business when no one else will.
WHAT ARE BUSINESS ANGELS
I’m sure you already know what a Business Angel is or at the very least you’ve heard about them once or twice before. But just to make sure we are on the same page, a Business Angel is an individual (even though you can also find some associations) who is willing to invest his personal money in early stage ventures.
By early stage, we mean brand new startups that still haven’t yet validated their concept or already have customers but are looking to start growing.
It seems they are regular investors, right? However, these guys are not quite the same as the traditional Venture Capital Investors (VC’s). Yes, they can give you money to create or grow a business, and many times they will require a small stake of your company’s equity, as it also happens with regular Investors.
But there’s a good reason why Angel Investors are called “Angels” in the first place.
Note: equity, in an investment context, is the same as looking at your company like it would have only 100 shares. Initially, the founders have all the 100 shares, but as the time goes by and other investors fund the company, they will require some of the shares for themselves, reducing the owner’s stake gradually.
WHAT MAKES BUSINESS ANGELS UNIQUE
Reason 1: The Timing
When regular Investors (VC’s) will commonly aim at investing in widely growing companies (the so-called “Investment Series A, B or C” – usually above one million euros’ valuation), a Business Angel will essentially focus on pre-seed and early stage startups.
Consequentially, Angels are many times investing in companies that didn’t even proof its concept. As you can imagine, these are projects that present a huge risk; the odds they will fail are extremely high.
Reason 2: Higher Risk
Business Angels tend to be highly successfully individuals, who have been entrepreneurs before, investors in other firms or are now investing just for the sports adrenaline. Either way, these guys are capable of embracing a lot more risk because they don’t see investments as formal and rigorous as the VC’s see. At least not anymore.
The reason why they are called “Angels” derives precisely from the fact that these are the guys who will help you, even when no one else does. If you have a fantastic team, passion, and enthusiasm, and you’re able to sell your business idea to a Business Angel, he might very well support you and give you the money you need.
Obviously, it is also easier for them to embrace risk at this stage because the initial capital requirements usually aren’t that high; we might be talking about numbers that range from 50k to 150k Euros.
Reason 3: They really are Angels
Wait, did you think they were already great? Then let me tell you that Business Angels not only invest in early stage firms when barely anyone else will, but they also tend to require a smaller equity stake.
It means these investors will, above anything else, give you the capital and trust in your capabilities, encourage you to make the best out of your business, and expect to make a giant profit in the long term, which is definitely admirable.
This is why they really are Angels. These Investors are not focused solely on money; they frequently look for ways to give back to society for altruism reasons.
Reason 4: No control freaks
Last but not least, Angel investors will let you manage your business in an entirely autonomous mode. They will never get in your way and try to handle the company for you.
You see, these folks have their lives, their families, their hobbies, and passions, and they don’t want to invest in companies that require them to provide any periodical help. All they want is to see you and your team thrive.
Final note: I’d like to share that even though most of the Angels present behaviors similar to the ones I’m describing here, not all of them will be like these. Apparently, you will also find control freak Angels, who are only trying to exploit you financially. It’s part of life.
WHERE CAN YOU FIND BUSINESS ANGELS
There are three typical channels to find Business Angels.
Channel 1: Events and Startup competitions
It is possible that you haven’t heard of these type of gatherings in which you combine both startups and investors, but let me tell this is probably the best way to get in touch with investors and to establish a reliable network of contacts.
So what type of events are we talking about:
1. Large Summits, such as Web Summit. Some of the best examples are:
- Lift Conference: since 2006 Lift Events explores the business and social implications of technological innovation through the organization of international event series and open innovation programs in Europe and Asia
- Web Summit: a technology conference held annually since 2010. The topic of the conference is centered on internet technology and attendees range from Fortune 500 companies to the world’s most exciting tech companies
- Startup Grind: Startup Grind is the largest independent startup community, actively educating, inspiring, and connecting 400,000 founders in over 200 cities.
- Launch: created by Jason Calacanis. The Festival now averages 10,000 attendees per year and features a few dozen speakers well known in the start up world
- Collision: the “America’s fastest growing tech conference” created by the team behind Web Summit. In three years, Collision has grown to over 11,000 attendees from more than 100 countries
- 99U: the goal of the 99U Conference is to shift the focus from idea generation to idea execution. Providing road-tested insights on how to make your ideas happen.
2. Angel and Investors Conferences
3. Hackathons and competitions
Even if you are one of those guys that have a hard time talking to strangers – as I am – all you need in this type of events is a professional business card and a sales pitch.
Make sure you thoroughly memorize your pitch and be ready to present it to multiple people within the walls of the venue. I’ve been in many of these Summits, and I’m very confident you will manage to, not only meet a hand of potential Angel investors, but also create relevant connections to your future.
You see, these Summits’ value is mainly focused on networking, and you don’t even need to make a great effort to go out and meet people, people will come to you. And then, if you start getting used to meet people randomly, you will surely make dozens of great contacts here. It is the best way to find Business Angels.
Channel 2: Incubators and Accelerators
Incubators and Accelerators are firms that provide special programs to Startups to help them either proofing a concept or growing.
Typically, both genres provide office space and lots of networking opportunities, whether with other startups or advisors, at a cost. Some can be free, but usually, they ask for a monthly fee. It is like renting office space but having access to a rich entrepreneurial environment at the same time.
Because these firms are so close to the entrepreneurial world, as very often they are also the founders of massive summits, they have an exhaustive list of contacts of the primary investment entities, at least within your national reach.
There are people which job is to manage the relations with investors. Given this, if you believe it is the right time to approach investors, because otherwise, you won’t be able to grow further and sustain your business, try to reach out to investors through the Incubators and Accelerators network, I’m positive that it will work out.
Channel 3: Network of contacts
For sure, one of the ways to get in reach with investors will be through your network of contacts, as I’m sure you know. But I honestly don’t want this paragraph to be similar to what I often see on other blogs.
What usually happens: someone tells you how important it is to leverage your network.
What we really do: nothing.
I’ve seen so many people talking about networking and how important it is, but actually few can build strong relationships and then, consequentially, benefit from them.
So here I want to give you a quick guide on what to do to getting along with fascinating people that will, eventually, want to help you.
- Try to see networking as building genuine relationships with other people.
- Whenever you engage in a conversation, it is much better to listen carefully and get to know the other person, instead of talking about ourselves and our desires.
- At the end of the day, people mainly care about themselves and, besides, when in a verbal chat there’s good chance the other part will end up saying you’re a great conversationalist if you listen more than you talk.
- I would advise you to be transparent and genuine, always. If you want to write to someone who you don’t talk to for a long time asking for a favor, tell the truth; do not try to outsmart people. It works very well to apologize for not talking for such a long time and mentioning that this favor you’d like to ask was the perfect excuse to get finally in touch again. You could end up inviting for a coffee in an upcoming date because you genuinely like that person and want to hear from them.
I hope this small guide can be helpful to you. It is a shame that so many people get stopped by their inertia in contacting people. I’m here to help, though, and if you have any question, shoot me an email.
Channel 4: Social Media and Website
We won’t spend too much time here because it is pretty much straightforward. If you know with whom you want to speak, it is always a good idea to try to find the investors on Twitter, LinkedIn or their own website. Some Business Angels have a website, which is also great to know them and prepare for a potential meeting.
When it comes to Social Media, I will stick to Twitter and LinkedIn. That’s pretty much all that matters nowadays.
Still, let me warn you that they receive a lot of daily requests. It is important to have in the mind that Business Angels might never get back to you because they receive ten more requests like ours per day.
You can make a list of 10 to 20 investors with whom you’d like to talk and get in contact with all of them. You should be able to receive at least five positive replies.
WHAT DO BUSINESS ANGELS VALUE
Business Angels, just like any other type of investor, value above anything else, the Team.
You can find some presentations that talk about seven or eight other topics, but to be honest with you these won’t even get close to the Team’s importance.
For that reason, we will dwell entirely into the team and save some final words to the other features.
If you want to learn more about the core entrepreneurial attributes, I recommend you read the post called “The Three Fundamentals for Success,” because some of the issues were addressed in more detail.
Attribute 1: Attitude
For the purpose of this chapter, I decided to Google for “Attitude definition.” According to TheFreeDictionary.com, Attitude stands for:
“A manner of thinking, feeling or behaving that reflects a state of mind or disposition.”
We can also find millions of quotes online about Attitude. But after all, how can we visualize and understand what is great attitude and why Business Angels value it so much?
Well, because Attitude is the conducting wire that connects everything we do. It is the way how we perceive and embrace change, learn and execute, the humility, the hunger to be better and the capability to listen.
It is the number one most demanded trait because it guarantees that this person has ethics, integrity, and willingness to learn, which is crucial if you want to be great and overcome every obstacle.
Attribute 2: Commitment
The second attribute is the commitment, and this one can be easily understood. An investor will only need to ask the team for their current status, and as soon as the team says they aren’t yet working in full-time because they are waiting for the money, the lights will immediately turn off in the investor’s mind.
This is tough; I get it. People have responsibilities and many times it’s barely impossible to leave a safe job and throw everything out of the window to create a new project. But we still got to be able to show that we are 100% commitment. Otherwise, no one will give us their money.
So what are the three ways you can show someone that you are absolutely committed to this project?
- Time allocation: do you have a full-time job and are you waiting for that funding to leap to your startup? Won’t easily happen.
- Money invested: how much have you invested of your personal money? The more you invest, the more you show that you actually believe in the concept.
- Project duration: how long have you been working on the project in your spare time? Is it something recent with one or two months or have you been investing all the time you have for the last two years?
Leaving a safe job to create a startup is not the only way to show a Business Angel how committed you are. There is really no excuse when it comes to this attribute, and it pisses me off every time I see these outstanding teams creating this giant aircraft projects waiting to fundraise one or two million euros, so they have money to survive for two whole years.
If you do not show commitment, the money will not follow, because the investor cannot be sure that you will endure in the face of any obstacle.
Attribute 3: Determination
Oh, this is another big one. Determination or grit is the single most important quality when determining success, as Angela Lee Duckworth studied.
You may wonder why.
Basically, it comes down to the fact that even a brilliant guy can easily give up. It doesn’t matter how intelligent or gifted one is, if we do not commit to being successful no matter what and apply the hard working, we won’t get to the surface of the ocean.
There are numerous stories of guys who don’t consider themselves smarter than their colleagues and friends, but because they have this grit and resilience to stand still against any setback, they have been able to build what all the others couldn’t and achieve what few can achieve.
And because we also like those inspiring quotes, let us conclude with one:
“Giving up is the only sure way to fail.” – Gena Showalter
Attribute 4: Know-how mix
Naturally, the team’s composition and areas of expertise will also be relevant. In this case, you want to make sure you or your team have a particular set of characteristics.
At least one person has the technical or specific know-how required for your niche activity. If you’re starting a business in the accommodation sector, it is important that at least one of the members has previous experience in this industry.
It isn’t like having experience is all it takes for a successful business, quite far from that actually. But it increases the likelihood of having a Business Angel backing up your startup, as it enhances the level of confidence.
It is also important, as you might know, to diversify the team member’s knowledge. Typically, you wouldn’t want all the founders with the same previous experience and area of expertise. It is useful to have someone more sales and business development oriented and, for instance, another guy that is strong in technology.
This will not only provide your team with more balanced internal resources, which leads to the creation of overall better decisions but will also increase the level of confidence of a given investor.
AND ALL THE REST
Even though the team is by far the most important criterion, we cannot forget other issues such as the overall Business Model you are presenting. In this case, I’d like to follow a conventional structure that I believe will help you having a straightforward and definite picture of all the Lego pieces you should consider in your Business Model – it is called The Business Model Canvas.
First of all, what is a Business Model?
According to Investopedia.com, the Business Model stands for the plan implemented by a company to generate revenue and make a profit from its operations. The model includes the components and functions of the business, as well as the revenues it generates and the overall expenses.
If I may say so, every time you want to refer to a precise business, you may call it “Business Model” because this is the structure that aggregates every major block of information related to the way the company operates.
What areas will a Business Angel analyze
1. What are you selling: this must be defined in one single sentence, simple and concise. If you cannot communicate in one sentence what is your business, you should keep on simplifying it, because that means it still isn’t focused enough to be successful.
2. What’s your unique value proposition: What makes the product stand out: this is where strategy comes in. You want to share if your product is cheaper than the others or different. If it is different, then how is it unique? Is it a feature? A channel? A type of need it solves no one else addresses?
3. What are the revenue streams: usually this will have a simple question because your business should start simple enough to have only one revenue stream – ex: online payments. If you’re starting with more than one revenue stream, once again, I would humbly advise thinking how you can focus to guarantee that every step you take drives growth.
4. What are the market segments and your target market: a more management oriented investor will want to understand how is the market segmented and which one is your target, from those segments. You can segment by anything, age, need, purchasing period, price, features, you name it.
5. How’s the cost structure: Types of variable and fixed costs you must incur: generally speaking, you should aim at starting with the lowest possible fixed costs and with only variable costs. Why? Because this way you reduce the risk. You only cash-out when you sell, and you benefit from a profit margin on each sale. Variable expenses are the costs of goods sold, which stands for the expenses that you incur to sell a given good. The fixed costs, on the contrary, are the costs that you have each month, independently of selling or not, such as rents and salaries.
6. Who are your key partners: who are the players that are essential for you to make money? Do you need a supply partner to reduce production costs? Or perhaps your software platform will be sold through a network of resellers? The main question here is: what partnerships must your business have to become profitable.
7. What are the core activities of your business: this point is outstanding to prioritize from day one. It is crucial to have a clear idea of what pushes your business forward because you don’t want to spend resources in activities that are fruitless. So what is core to you? Is it writing code? Recruiting? Selling? Establishing partnerships?
8. What critical resources do you need: what do you need to make this work? Is it a matter of having capital? Or do you need to hire a great salesperson? Is there a single raw material that is essential to you?
9. In which channels do you plan to sell: in a broad overview, you can virtually segment your channels in offline vs. online. But from here you can still find a lot more subsegments. As an example, if you’re selling a consumer good, where do you intend to sell it? On mass retail distribution or grocery shops?
10. How will you build customer relationships: this is so important, and yet most of the time it is totally undervalued. Even the most experienced investors forget to mention this subject because it is mainly attached to marketing and a more emotional side of your company. The central questions here are: where will you get your customers and how will you treat them after they purchase the product? How will you guarantee that you have no churn rate or dissatisfaction?
THE TWO MAIN MISTAKES WHEN DEALING WITH BUSINESS ANGELS
We’re arriving at the end of this chapter, and I’d like to leave you with some final tips to overcome the two main difficulties when addressing Business Angels or any investor, for that matter.
Based on my entrepreneurial experience and investment manager position in the largest corporate venture capital in Portugal, I’ve found that you can undoubtedly identify dozens of mistakes, but there are two of them that tend to be frequently seen and seriously undermine the odds of a successful meeting with an investor.
If you’d like to mention some more mistakes, you’re totally free to do so in the comments section.
Mistake 1: Addressing Business Angels in the wrong timing
In the first place, it is crucial to highlight that most of the entrepreneurs have a tremendous will to make their businesses scale and grow fast. Most of the times they think all they need to grow their businesses is cash because with capital everything will speed up.
Well, this is not entirely accurate. Let me tell you why:
If you’re just starting your new project, and you haven’t yet had the chance to test and validate the concept, there is still room to improve before raising the money from a Business Angel. I mean, some projects are extremely hard to test, but that isn’t the case of the vast majority.
Even though it might seem tricky to validate a business idea at a first glance, the reality is that it is way easier than we many times think. And also, there are Business Angels who invest in non-validated ideas, but these are rare cases in which the team is great, the idea ambitious, and it is highly expensive to test the product. For this reason, the funding serves to create a Prototype or a Minimum Viable Product.
So the main lesson here is: make sure you’ve streamlined everything in your business, from testing the product to processes optimization and cost efficiency, before you fundraise. You want to ensure there’s an explicit purpose of addressing the Business Angel. Otherwise, he will just think you’re getting in touch because you’re trying to get lucky and don’t have a structured path in place – which decreases your credibility.
Consequentially, most of the Business Angels will tell you to work on your product, validate it and come back later. Which doesn’t mean he’s not interested, but remember that having a meeting with a Business Angel might be something hard to get, as they are really busy persons, and you want to make sure you take the most benefit of each and every minute you spend with them.
Mistake 2: Having a poor pitch
By pitch, we mean your presentation speech. Usually varies from 3 up to 15 minutes, no more than that. You can find infinite online resources about making a perfect pitch, but I’ll try to pass you something I didn’t yet find, so hopefully you can withdraw more value from this.
1. Work on your tone
Investors spend a significant part of their time listening to startup pitches, and it can definitely get boring, trust me (especially in those speed dating events in which you meet 30 startups in 1,5 hours). So you want to make sure to stand out from the other guys.
Now, how can you do this solely by working on your pitch’s tone?
- Bring all your enthusiasm and passion for this business to the surface and show it in your pitch
- Guarantee that only one person speaks at the presentation to be coherent, structured and easy to follow
- Speak slowly and learn to highlight the keywords to better impact the audience
Don’t underestimate the importance of how you speak. Remember that more than 90% of communication is body language and tone.
2. Not knowing how to sell your product
This is the second major weakness of many pitches we evaluate. But once again, people don’t actually define this as a pitching mistake, because it is easier to blame the symptoms instead of addressing the real disease beneath them.
Often people will tell you that you focus too much on numbers or technology. In other cases, they will inform you that they don’t see how your product can be unique, or why would anyone buy that product. Thirdly, some guys tell you they do not understand what’s the business case.
All of these sentences mean the same: you didn’t sell them your product.
Now, it doesn’t mean the investors need to be future customers. Definitely, that’s not what I mean. But investors are usually experienced in a wide range of sectors, and they can easily understand a robust business case.
So the first thing you need to know is that the most important part of your pitch is the Business Case. It is the sentence in which you completely ignore the product features and the technology and just focus on explaining how the end customer will benefit from the product.
What is the particular need you’re addressing? And if you can directly imply how much (financially speaking) would your customer benefit from the product, Jesus Christ, that’s so good, because you can then say that you can quickly ask for 10% of what your customer wins.
Let me give you an example:
Now, if they present it like this, an investor might not perfectly understand how great this product really is and which need does it solve. So I’ll make my best to exemplify a better way of pitching this technology:
“A leading edge and simple-to-use technology that allows an engineering team to visualize the end user’s web browser in real time, which helps the organization decreasing the correction time of bugs in 75%!”
Do you like it? I’m sure you can do better; this is just an example.
You see, in one sentence you’re saying that:
- It is a leading edge technology
- That it is very simple to use
- Its target is the engineering team who will be fixing bugs
- The correct time is now decreased by 75%
- We can directly calculate a 25€ saving in each hour of labor.
Now, if you want to learn how to create a perfect pitch and what are the typical mistakes entrepreneurs do, in a more detailed and technical perspective, head onto the following links.
- How to Pitch to a VC by David S. Rose on TED Talk
- 5 Worst Mistakes Entrepreneurs Make When Pitching Investors by Jason Fell
And there you go, hope this essay helps you to grasp who are Business Angels and Investors overall, what they’re looking for and how can you benefit from fundraising with them.