The art of pitching angel investors is a delicate one and the results of a successful pitch can change the lives of both investors and entrepreneurs.
This article will answer some initial but critical questions about pitching investors.
First Decide Whether You Need an Angel Investor Or Venture Capitalist.
Angel investors differ from venture capitalists in terms of investment level and business focus. Angel investors are individuals who typically invest from between $25,000 to $100,000, of their own money, in very early stage startups. Often these startups will be pre-revenue or below $100k /month in revenue.
Traditional venture capitalists generally prefer to invest in established businesses generating >$100k /month revenue. Essentially, venture capitalists are institutional investors who pool client funds to invest anywhere from $1 million to $20 milllion in emerging growth companies. In terms of equity, venture capitalists often seek higher levels than angel investors (from 10% to 20%). VCs will also expect a much higher rate of return than angels.
The profile and outcomes of angel investment
Angel investors are typically high net-worth individuals who have the ability to invest in high-risk, high return entrepreneurial ventures. They are often 45-65 years of age and many are male, possess post-graduate degrees, have previous management experience and look for annual rates of return from 22% to 50%. Many of these investors also prefer to invest in companies that are situated less than 200 kms from their place of residence.
Typically, these self-made millionaires reject 9 out of 10 entrepreneurial pitches. They are focused on highly-scalable investment opportunities. An example of a highly-scaleable company is one that can conceivably grow to annualised revenues of greater than $30 million within 5 years. If such a company was then successfully exited (trade sale or IPO), such a scenario could constitute a 10x-100x return on investment for any prospective angel investor.
Angel investors benefit entrepreneurs by allowing them to leverage their vast industry experience and access to other investors and strategic partners. A Canadian study showed that almost 60% of firms in Ottawa that obtained angel funds eventually received venture capital funds.
Typical Terms Of Angel Investor Financing Rounds
The myth is that angel investors invest in good people; the truth is that angel investors are focused on financing ventures that will provide a substantial Return On Investment (ROI) for their funds, which requires great people to execute. The ROI is key, which brings us to what a lead angel investor, representing a group of angels, typically requires in exchange for seed money and mentoring services:
- a seat on the Board of Directors and influence over management
- Industries are seeing a rising trend in angel investors requiring some control over their investment. Many of these investors reportedly spend 10% to 50% of their time mentoring the entrepreneur and key members of the management team, assisting in crisis management, serving on the Board of Directors, interviewing management candidates, and collaborating with the controller to develop effective financial metrics.
- veto power over the issue of new company shares.
- veto power over the level of long-term debt incurred by the firm.
- approval rights over remuneration levels for top executives.
- compensation for time spent in spearheading business operations.
What To Include In Your Pitch To Angel Investors.
It has been said that entrepreneurs need to focus on human connections. What is also critical, however, is the need to combine emotional connection with empirical evidence of an enterprise's viability.
An entrepreneur can do both by utilizing an investor presentation and slide deck portfolio to capture the attention of potential investors. For example, Capital Pitch explains how the use of a pitch deck template and due diligence checklist can contribute to a successful pitch. Pitch deck slides are crucial because they enable the entrepreneur to follow a narrative, quantify every investable point and ensure no critical pieces of information are forgotten.
An effective pitch deck includes information on how an entrepreneur has an authentic connection to a problem, can resolve this pain-point for a specific target market, what the target domestic and global market is, who the firm's competitors will be, what the firm's unique selling proposition and marketing plan is, go-to-market strategy and what revenues the company has now and can expect.
The pitch deck should also include information about intellectual property such as patents, trademarks, and industrial designs. Additionally, it is good practice to disclose information about social networking accounts, employee pension plans and union participation, as well as IT infrastructure and disaster recovery plans.
One of the most effective pitch tactics is to identify early in the presentation the villain and the hero in a firm's business paradigm. Investors want to see how an entrepreneur can deliver unique solutions to existing industry pain-points and how any seed money they provide will result in a commensurate ROI. Entrepreneurs should also share the stage with the management team; this assures investors that entrepreneurs have a solid support team behind them.
Last, but not least, entrepreneurs must address the specific concerns of angel investors. These investors are primarily concerned about:
- An entrepreneur's actual ability to scale up and sustain a company's viability. For the most part, budding entrepreneurs have few workable ideas on how to propel their startups into scaleable companies that will be worth new rounds of investment in the future. Essentially, many entrepreneurs lack the experiential framework to make informed business decisions. Although this is where an investor comes in, entrepreneurs must indicate that they are willing to listen to advice that contradicts their predilections.
- The time investors will spend on their projects. Angel investors typically spend exhaustive hours on mentoring entrepreneurs and delivering practical solutions to problems. Investors are primarily interested in companies that can conceivably deliver high, not mediocre value. So, entrepreneurs must show that their projects are of ground-breaking social relevance and will result in highly lucrative ROI. In all, the most successful angel investors have deep and vibrant networks: therefore, it is imperative that budding entrepreneurs prove they are worthy of these opportunities.
Jeremy Liddle believes entrepreneurs change the world. He is Cofounder and CEO of CapitalPitch, a lead investor and platform to optimise investment in startups by combining an investment accelerator, venture capital and equity funding platform. CapitalPitch provides investors a curated source of emerging growth companies.
He is President for the G20 Young Entrepreneurs Alliance in Australia and works on youth employment and entrepreneurship with the United Nations, Global Entrepreneurship Week and B20 task forces. Jeremy is a Tedx speaker and author of the Book “From Idea to Start-up”.