Talking to Angels and Whales

How to win over the right kind of investors for your innovative startup.

I often hear people say that raising money is hard. Frankly, it is intended to be. However, the process is harder than necessary when entrepreneurs aren’t well-versed in the capital markets and the mindsets of those who typically invest in early-stage businesses.

In fact, seeking out investors is often easier for an early-stage venture than it is for an established company. The key is to understand the different kinds of investors and what they want to see.

Look for Lone Angels

After “friends and family” have been exhausted, and independent of any grants, awards and microloans, the first stop on the road to funding is the individual angel.

The angel’s role is simple: invest amounts of money that are not terribly meaningful to him, typically up to $100,000, behind a concept he finds attractive, in a market he thinks is attractive.

Since you likely are still developing your minimum viable product (MVP) and are precommercial, your only salable product is you.

The angel makes very few investments, so your pitch must be perfect and differentiated. You will have five to 10 minutes to capture the angel’s imagination, so you must be concise.

This is an investment in you and only you. If you fail here, it is because you did not sell yourself.

Pitching to Bands of Angels

The next step is pitching to groups of angels, who will provide funding of $250,000 to $1.5 million.

Angel networks want to combine their resources, experience, interests and diligence behind a series of investments in which they take a minority position.

More deals are done at this stage, but these groups see many, many good ideas. Successfully approaching this investor set requires a terrific business plan, but that is scarcely enough. What distinguishes a fundable deal from others involves a solution to a big and well-presented problem, scalable economics, competitive advantage, a product at the MVP stage and a hint of very early commercialization.

An extraordinary team is a real differentiator. The investors must see passion and investment on the part of the founders. Don’t ask them to invest unless you will. They will turn the deal upside down, so know your weaknesses and have answers for the tough questions.

Deal structure also is critical. Groups of angels will want a defensible valuation, favorable terms and an exit strategy. They have a limited horizon, so show them how they monetize their investment.

Land a Whale (or a Unicorn)

The last group to discuss is the venture capitalists. These are professional investors who have established a fund, usually involving a combination of high-net-worth people and institutions who seek to enhance their overall returns through investments in early-stage, high-potential companies.

Their concerns are the scalability of the business and its opportunities for growth. They may take either a minority position, or in some cases, they will take control. Because the cost of operating a fund is high, and because small deals and large deals take very similar resources to close, they focus on bigger opportunities. How big depends on the firm’s size, but typically runs no lower than $2 million (and most funds prefer a bit more).

To attract this group, you must have a quality, commercially acceptable product and have early commercialization. Your intellectual property must be protected, and your team must be complete. The quality of the pitch must be world class, because venture capitalists’ choices for investment are numerous. These folks see the best, so playing at this level requires you, your team, your market opportunity and your product to be exceptional.

Earning investors’ trust will demand your very best efforts, but don’t buy into the notion that there is no money out there for you. Oftentimes, that story comes from someone who was unsuccessful at getting his. If you know the rules, work hard, know your audience and help them to know you and your idea, this is very doable.

In the end, money needs to be deployed, and it chases great deals. Poor deals chase money. It is far better, in the end, to be pursued.