Raising capital from angel investors - usually themselves successful entrepreneurs often connected to the founder as a friend or family connection - has become a popular way to infuse capital in today's startups. Before approaching an angel investor, every founder must observe a few basics before they decide to seek funding from any source. As a brief outline, this piece is part of a series detailing the basics of raising funds with angel investors, where to meet them, how to talk to them, and the ins and outs of pitching. This is meant for a newcomer that is still learning the ropes.
Have an Idea and a Plan
Before you decide that you want to start meeting with angel investors, it should go without saying that you are going to need to have an idea and a plan to execute that idea. Simply put, it is smart to be able to flesh out at a business plan so you will have thought about how you are going to bring your idea to market and some of the logistics about the competition as well as budgeting and timelines of completion. You should be ready to present these in Guy Kawasaki style: 10 slides presented in 20 minutes with 30 point font.
Have a Team
You will need to have a team. If you can get at least two people on board with an idea then it will probably be much easier to get others to believe in your idea as well. In addition to that, you will also need to have your bases covered with either employees or advisors for all of your business, technological, financial, and public outreach needs. If you are working on something highly technical, it may benefit you to have a large board of advisors with PhDs and industry experts. If you are working on an app, having a CEO and CTO that are both competent with code will be equally helpful. Every team will be different, but the idea that it will play to the strengths of the company will be consistently important.
Have a Product
What have you actually done to build this out? If you have this as purely an idea stage, chances are you don’t need funding and won’t get it. If you are building an app, have your first iteration at least partially fleshed out or get something that you can get feedback from potential customers with. If you are working on something more technological, then have a prototype in process. It can be 3D printed and inexpensive, but showing that you have thought about how to turn this idea into something tangible (and more importantly, marketable) will show that you have the know-how to take the project on, as well as demonstrating that you have skin in the game that has already been invested into the idea. If you can get direct feedback from customers and present that to the angels, you can at least learn something in the process.
Have a Valuation
There are many ways to come to a number for a valuation. For an early stage company with a high potential for growth, an early stage valuation can be largely arbitrary. In the most basic of senses, a valuation is an indicator of how much you think a percentage of equity in your company is at this stage in the game. If an investor offers you $100,000 for a 20% share of equity, he is effectively saying that he thinks the company is worth a total of $500,000. Have this in mind before you think about meeting with an investor. You will want to know how much money you need and how much equity you are willing to part with to get that money.
Now that you've planned out your approach, you'll want to prepare for your meeting. Stay tuned for the next piece which will cover meeting and connecting with angel investors.