In 1999, when Seattle angel investor Geoff Entress jumped into his first startup — a digital music venture called UrbanEarth.com that ultimately failed in the dot-com bust — companies raised $1 million for servers and equipment just to get off the ground.
Today, launching a business costs a lot less, but sometime after maxing out credit cards and hitting up Aunt Martha, entrepreneurs still have to seek outside capital. Generally, they start with angel investors who offer smaller amounts but attach fewer strings to the money.
The trick is finding the right investor for your business.
“People engage in angel investing because they like to win,” according to Todd Federman, executive director of North Coast Angel Fund, a Cleveland organization of more than 180 individual investors. “For some people that means a financial return, for some people that means helping an entrepreneur be successful. Different people have different balances of how they like to win.”
Dice News asked several investors for their tips for entrepreneurs looking for angels. They are Geoff Entress, venture partner with early-stage venture capital firm Voyager Capital, Todd Federman, Jeff Martens, co-founder and CEO of Portland, Ore., startup CPUsage, and Lee Zapis, president of Zapis Capital Group, a venture firm based near Cleveland.
1. Be Clear About What Your Company Needs
“We struggled with the angel investor community because we were thinking so big,” says Martens, whose company offers a Platform-as-a-Service for high-throughput and high-performance computing. “We literally think we can change the world, and we knew what we needed to get there – and that wasn’t $200,000. We were thinking, ‘If we’re going to do this right, we need to start at $1 million for our initial funding.’”
The challenge, says Martens, was that the company didn’t align well with the area’s angel investors. “We had people saying, ‘Why don’t we give you $100,000 and see what you can do with it?’ While those were generous offers, we thought it through and thought we would just waste their money. We needed a larger traunch of money to do it right.”
CPUsage has since raised $925,000 from both angels and venture capital firms.
2. Due Diligence Works Both Ways
Individual angel investors are contributing their own money, so it’s a more personal transaction for them than venture capital. That can be a good or bad thing, Martens says.
“As an entrepreneur, you really need to figure out what your needs are and what type of investment you want. But you also have to look at what you need beyond the check,” he observes. It’s important to ask what, besides money, the angel brings to the table. What kind of industry connections do they have, for example. What kind of operational experience? Can and will they be a mentor and a guide for you?
On the other hand, you have to consider how involved you want the investor to be. Do they expect weekly written reports or time-consuming weekly meetings? It’s all a balance.
“You want active, value-add investors, people who can bring expertise to your business,” says Entress. “There are also non-active, value-add investors who just write checks. Then there are active, value-detracting investors. They’re always asking, ‘When are you going to sell? Why are you doing it that way?’ Then when you do sell, they’ll ask, ‘But did you get the best deal? I don’t want to let those people in.’”
Federman says it can be easier to go through a divorce than to break up with an investor. So think carefully about entering a relationship that will generally last five years or more.
3. Build a Team
One of Zapis’s most satisfying investments was in Onosys, an online restaurant ordering system bought out by Living Social last year for a reported $6.5 million. It was created by three students from Case Western Reserve University who brought complementary skills to the entrepreneurial table.
Investors want to see not just your own commitment, but that you’ve been able to attract other talented people to the venture. “So you’ve already jumped out of the plane, so to speak,” says Entress. “I want to see that you’ve got other people to jump out of the plane with you. And I want you to convince me to jump out as well.”
4. More Than an Idea
“As an investor, I may have heard the same idea 50 times over the years,” Entress says. “Hardly any idea is truly original. Facebook wasn’t the first social network, YouTube wasn’t the first video site. I want to know how your team can take this idea and do it better. Why is the time right?”
5. Articulate a Clear Vision
Entrepreneurs need to spell out how they plan to get from point A to B to C. Federman wants to work with entrepreneurs who are “super bright, super committed and super flexible, because in our experience, the first plan is usually wrong, often the first product or market, channel or approach is wrong.”
It comes down to the people involved and their ability to adapt even when they have to throw their roadmap out the window. “They should be able to demonstrate that they’ve thought deeply about what they’re trying to do,” Federman believes.
6. Perfect the Pitch
Investors want to hear a clear, succinct elevator pitch: who you are, what you’re doing, the problem you’re solving, how you’re solving it, how you’re doing it better, how much money you can make and how much money you need to do that. “Sometimes you can say all that in 30 seconds,” Entress says.
Zapis recalls how one young entrepreneur with a sales background nailed it at a “speed dating”-type event held by the Cleveland accelerator JumpStart. With just five minutes with each potential mentor, entrepreneurs had to explain their ventures very quickly. That’s the kind of performance to emulate.
7. Be Transparent
Entrepreneurs have to be totally honest in all details of their venture. “It’s great to be all starry-eyed about your business, but if I find out later that there was some risk that you didn’t tell me about, I’m not going to be very happy with you,” Entress warns.
8. Network Wisely
Get to know the players in your local market, Zapis advises. “In theory, this can be done from anywhere, but it’s a lot harder to keep tabs on things when the company is not local. I like a lot of face time,” he says.
9. Be Selective About Who You Do Business With
Your company’s lawyer or accountant can be the one who connects you with the right investor. Entress says some of his best referrals come from corporate attorneys. While going with a well-known firm might be expensive, it can pay off if it’s advocating on your behalf with the right people.
10. Follow Up
Zapis has said he’s walked away from otherwise promising ventures when they failed to respond promptly. “Timing is critical,” he says. “There’s a handful of businesses I looked at last year that just kind of dragged on getting back to me. They just didn’t seem as committed. I just lost interest.”