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Veteran Entrepreneurs Take Note -- Getting Funded

Posted by Michael Horn on Tue, May 05, 2015 @ 03:46 PM

Factors That Get Angel Investors To Write A Check

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Read this excellent article by Marc Kramer, Contributing Writer to the Atlanta Business Chronicle. He provides some great food for thought for those seeking funding. As we discuss in class, there are plenty of sources out there. Veteran entrepreneurs need to find their best source. Take a look at your product or service and compare it to the seven points Marc Kramer offers below.

Kramer writes---Although many people believe in spiritual angels, entrepreneurs tend to focus on the ones with large bank accounts, and they pray that some of that cash will go into their new enterprises.

How hard is it to raise money for a new venture, especially if you are a first time entrepreneur?

If you are going to institutional venture capitalists, who basically have left this space at the end of the last century, you would have an easier time getting a professional sports contract.

According to the Small Business Administration, there are about 600,000 startups in any given year and only 300, a half a percent, get money from venture capitalists.

Angels, on the other hand, have been carrying the world's investment in start-ups for literally hundreds of years going back to King Ferdinand and Queen Isabella investing in Christopher Columbus - a very profitable venture even if the deal changed from getting silks from China to finding gold in the New World.

Angel nation

There are more than 300,000 angels in the United States alone, investing more than $24 billion dollars a year, with companies getting on average $600,0000. That translates into roughly 40,000 of 600,000 startups getting funding from wealthy individuals, according to the Angel Capital Association. Triangulating Census data on new company starts and research from the University of New Hampshire Center for Venture Research, it looks like 5 to 10 percent of startups get money from angels.

The percentage chance of receiving angel capital, according to the Angel Capital Association, ranges from 10 percent to 20 percent for independent angels or informal syndicates. The Center for Venture Research puts the historical average "yield rate" at 15 percent.

For 90 percent of ventures, angels are the right way to go because they know what the entrepreneur will face, and are typically more patient about how long it takes to get a company into the black. For those of you who watch "Shark Tank," here are what investors like Mr. Wonderful (Kevin O'Leary), Mark Cuban and gang look for:

1. Problem that needs solving. Not too many investors want to throw money at the next Pet Rock or Beanie Baby. They want to know that there is a problem that needs solving such as cyber security software or anything that can help companies increase sales or reduce expenses. Angels come in all shapes, sizes and interests, so deals like clothing designer Tory Burch get financed.

2. Big market. We are talking billion-dollar market and growing, Companies that don't grow to a minimum of $50 million in sales or have tremendous upside like SnapChat, Barefoot Wines and Zynga don't attract investment because the market to sell those companies is typically private equity and angels are looking for sizeable companies. Naturally there exceptions to every rule.

3. Scalable. The business has to be able to grow with virtually no end in sight. Think in the beginning when Google and LifeLock started. There were lots of potential buyers with a problem that needed solving like finding information quickly and protecting one's personal information from credit card thieves.

4. Competition. This will sound crazy to you, but competition is good. I have started ventures where I was first to the market and had to spend a load of money educating the market. The guys usually first to market either run out of money or get run over by the guys riding their tail. Think about Netscape, you have to be over 40 to remember that company. It was the first major search engine. Watch the movies Braveheart or any of the Hobbit series. What happens to the first guys to join a battle is that they typically get slaughtered.

5. Management. Experienced operators who know how to sell, not just come up with a good idea and develop the product. The graveyard of business is stacked higher than the new World Trade Center towers with great ideas that couldn't or didn't sell. Angels want to see sales people that have sold a similar product and, even better, successfully sold a product that no one knows.

6. Patentable. It's nice to have a patented product that can stop hordes of others from entering your space. A little competition is good, but too much competition is bad because then you have to spend a lot of money to be heard. Patents are also good if the business goes south and the patents can be sold or licensed.

7. Sales. The vast majority of investors want to see someone is willing to buy whatever you are trying to sell. They are looking for validation. Surveys are nice, and I have had ventures where independent surveys said we had a winner, but not until you try to get people to part with their hard-earned cash do you find out if you really have a tangible opportunity or just good cocktail conversation.

Today's investors like to read a short executive summary with five years of projections and one year of cash flow, followed by a business plan. Many younger angels, under the age of 50, say a 20-page business plan isn't necessary, but I have seen few deals get funded without a full business and operating plan. Besides, writing a full plan helps you see what is in front of you and makes it easier to answer the hard questions.

Topics: Veteran, Entrepreneurs, Resources, VC, angel-investor