What Every Angel Investor Wants You to Know - Book Summary

The journey to funding your start-up: learning to lure an angel investor

Visualize your start-up journey like an oceanic expedition. To cross that sea of uncertainty, you'll want the right crew aboard your ship. Landing an investor is the crux of this quest, though the waters are often treacherous.

A decent number of investors are the equivalent of high seas pirates — they're just out for a quick gold booty. They've got money aplenty, but not much else to offer. That's not what you're looking for. You need an angel investor, a rare breed who may not rival the riches of a titan like Bill Gates but invests with an eye toward ushering aspiring start-ups towards their dreams.

So, if your entrepreneurial dreams require a financial windsail, then prepare yourself for a thrilling voyage into the world of angel investors.

In this auditory odyssey, expect to uncover:

1. The intriguing similarity between an investor and a spouse.

2. The art of embracing rejection, and using 'no' to your advantage.

3. An amusing tale of how an entrepreneur convinced an angel investor to trial his underwear.

Setting sail with smart money: Why entrepreneurs need more than just cash

Who hasn't daydreamed about breaking free from their nine-to-five and venturing into their own business, whether it's starting a modest lawn-mowing service or launching a colossal tech company?

One immutable truth is at the heart of all these entrepreneurial dreams: Every start-up needs capital to get off the ground.

For many visionaries, this necessitates unearthing an investor, and, if fortune smiles, securing an angel investor.

An angel investor is an individual who infuses start-ups with her personal wealth, purchasing a share of the nascent venture. They typically have personal assets exceeding a million dollars or an annual income of more than $200,000 — $300,000 for jointly filing spouses.

Looking at these thresholds, it's no surprise that a mere three percent of Americans fit the bill to be angel investors!

But what sets angel investors apart from run-of-the-mill investors is their readiness to offer more than just a financial boost. Certainly, they're ready to pen checks, but they're equally keen on dedicating time, sharing hard-earned wisdom, and opening their network to you.

Having financed a plethora of enterprises, angel investors accrue a wealth of knowledge, which they can pass onto you, potentially enabling you to dodge early missteps.

Often, angel investors are part of an investors' network. Should you find one who truly believes in your vision, she may lead you towards other prospective funders.

But many entrepreneurs fall into the trap of racing towards securing funds. They're often willing to ink a deal with the first investor who extends a hand, without considering the long-term implications.

Remember this: Your bond with your investor is akin to a marriage — you're in it together for the long haul, and you have shared stakes in the business.

You need an investor who will stick with you through turbulent times, someone ready to ride out storms, not just bask in sunny success.

Put simply, you need an angel investor!

The question is, how does one go about finding this guardian of start-up dreams? Let's chart the course ahead in our following exploration.

Nailing your pitch: The art of captivating angel investors

Successful entrepreneurs are anything but wallflowers. To find success in the business world, you need to step out and speak up. Igniting the same fire of passion for your business in others, which burns brightly within you, is key.

Persuading angel investors requires extra effort. They've been around the block; they've heard all sorts of pitches, so you need to make yours stand out!

Angel investors, despite their heavenly moniker, won't magically appear at your doorstep. You need to reach out to them in a way that resonates and forges a personal connection.

To do this effectively, preparation is crucial. Conduct in-depth research about your prospective investor. At a minimum, familiarize yourself with their investment history and preferences. It's a cardinal sin to appear ill-prepared, disinterested, or even worse — lazy — when trying to catch the eye of an investor.

Strive for a personal touch when engaging with angel investors. Find shared interests, mutual acquaintances, or common hobbies and use these commonalities as connection points.

Your objective in contacting an investor should be to reel them in swiftly. Treat every pitch as if it’s your last shot. You want to grab their attention from the get-go. A lukewarm response is a no-go.

A tried-and-tested method to make a strong impression is crafting a potent elevator pitch for your initial interaction. The concept revolves around a succinct pitch designed to pique their interest immediately.

Ideally, your pitch should comprise fewer than 150 words, lasting no more than 30 seconds, but within that timeframe, it must underscore the specific problem that your product is poised to solve.

Brace for tough questions: The angel investor's interrogation

Before taking a leap of faith with you at a dizzying altitude, an angel investor will want to know if you've packed a parachute — and she'll want a crash course on how it operates.

The same analogy applies to your entrepreneurial venture. Unless you can lucidly lay out the blueprint of your business operation, an angel investor isn't likely to open her checkbook.

Although being under the spotlight might be nerve-wracking, providing comprehensive information about your business is non-negotiable. Without sufficient convincing evidence, investors won't regard your start-up as a sound investment of their time or money.

Consider their perspective. Would you entrust your hard-earned money to a half-baked business idea? Say, an entrepreneur aspires to "build nice tables," would you plunge your resources into such a venture? Unlikely. That is, unless they can clarify their strategy to outmaneuver rivals and sway consumers that their tables are unparalleled.

Investing inherently carries risk. A scant number of start-ups yield profits, and angel investors are well aware that they may lose a considerable slice of their investments. While they can't completely sidestep the risks, they can certainly strive to curtail it by gathering extensive information.

A common route they take to this end is probing you with due diligence questions, aiming to sniff out potential liabilities lurking in your business. Anticipate requests for a vast range of information — from patents-in-progress to recent internal squabbles among your team.

Expect serious investors to present these questions, but the conversation can be steered more advantageously if you initiate it yourself!

Having hiccups with your start-up won't necessarily hinder your investment prospects. Every start-up experiences turbulence. Transparently discussing these issues underscores your honesty, which can cement your credibility in the eyes of angel investors.

Handling rejection gracefully: The art of taking "no" for an answer and seeking feedback

You followed the playbook to a T: pitched your venture impeccably, acknowledged your strengths, and didn't shy away from your weaknesses. But, when you posed the question — "Are you in?" — all you got was an unequivocal "no."

So, where do you go from here?

Firstly, learn to value an immediate "no." It saves both parties invaluable time and circumvents unnecessary complications.

Remember, it's impossible to elicit a "yes" from everyone. Encountering "no" is an unavoidable part of the process and it isn't necessarily a setback.

Many investors hesitate to declare a definitive "no" upfront. This may stem from their uncertainty, a desire to keep their options open, or an aversion to creating an awkward situation. However, this ambiguity serves you no good, leading you to waste time pitching to an investor who isn't genuinely interested.

Avoid getting trapped in this ambiguous zone. Insist on a clear "yes" or "no," and equip yourself to accept either response gracefully. While another investor might be around the corner, lost time is irretrievable — so aim for promptness.

Sometimes, a "no" can carry a silver lining. Some investors may explain their reasoning behind declining your proposal. Heed their feedback carefully and ponder ways to hone your pitch for future scenarios.

For instance, an investor might express reservations about your product's pricing, believing that it could disrupt her capital structure. Armed with this feedback, you could recalibrate your business plan to lower your prices, making your proposal more enticing for subsequent potential investors.

Don’t hesitate to solicit feedback! Doing so might spark your investor's instinctive desire to assist, leading to some profound insights.

We've explored how to approach an angel investor. As we forge ahead, we'll learn how to rally them to your side.

Display your team's integrity, entrepreneurial prowess, and harmony to impress investors

As a start-up team pitching to an angel investor, your arsenal often consists merely of your business blueprint and your collective personas. Therefore, you must put your best foot forward with both, by demonstrating the right mix of personalities within your team!

In essence, an angel investor places her trust in the commitments you make, making it crucial that she perceives your promises as trustworthy.

We've reiterated that investing carries a high-risk factor. Regardless of how exhaustive your market research is, ultimately, it boils down to the level of trust an investor is willing to vest in you. Your paramount objective should be to project your integrity beyond any shadow of a doubt to the angel investor.

A key facet of exhibiting integrity is simply being transparent about who you are. Authenticity is vital — don't adopt Silicon Valley lingo if you hail from New Jersey. The investor isn't concerned about your origins or accent. Her primary interest lies in whether she can place her trust in you.

However, trust isn't the only ingredient. An investor can appreciate your idea and your integrity, but still harbor doubts about your competence in executing your plan. In other words, investors need to be reassured that you have entrepreneurial DNA.

Demonstrating that your team boasts entrepreneurial experience — even if it ended in failure — is pivotal, as it serves as an endorsement of your acquired management skills.

Lastly, you'll need to convince the investor that your team has the synergy to operate effectively as a unit.

Teams are the bedrock of start-up ventures. Their capacity to share responsibilities and collaborate can dictate the success or doom of the start-up.

When deliberating investment decisions, the author personally prioritizes teammanship. This comprehensive term encapsulates a founding team united by a shared vision, with each member exhibiting unwavering dedication to achieve mutual goals and settle disputes.

Striking the balance: Blend grand visions with a grounded execution strategy and a close eye on the numbers

To win over an angel investor, you'll need to walk the tightrope between lofty aspirations and pragmatic execution.

At the heart of every start-up lies a conviction that kindles the creation of a unique product or service. Sure, the goal of making money is a crucial aspect of entrepreneurship, but there needs to be a deeper driving force — your personal truth, your mission to revolutionize the world.

Expressing your belief in your venture convinces a potential investor of your idea's substance, signaling that you'll strive relentlessly to make it a reality.

However, a vision too grand can cast you as a mere daydreamer if not supported by a solid action plan. It's essential to map out for angel investors the specific path you intend to follow to realize your vision.

Overlooking the minutiae, such as profit margins or managing bank loans, is a mistake. Although they may not be as thrilling as envisioning your grand scheme, they are pivotal to bringing your dream to life.

Take the example of Tom Patterson, the brain behind Tommy John. Patterson believed that the men's underwear segment was significantly underdeveloped relative to women's underwear. He aimed to disrupt this space by creating an undershirt that wouldn't bunch up or slip out.

While Patterson's vision was clear, he didn't disregard the facts and figures of the competitive apparel market. When he pitched to the investor group, The New York Angels, in September 2011, the author — now a committed Tommy John user — was so impressed by Patterson's grasp of the financial dynamics of the business that he opted to invest.

Fast forward a year, and Tommy John's revenue had mushroomed from 1.5 million dollars to a whopping 5 million dollars.

Begin with the end in sight: Start-ups should have an exit strategy from the get-go

A surefire method to pique an investor's interest is demonstrating foresight about an exit strategy.

Two main exit options exist for start-ups: acquisition by a larger company or going public (although the latter is incredibly rare for fledgling firms).

Having an exit plan in place implies that you've identified a prospective buyer interested in your start-up, and you've orchestrated the prerequisites for the acquisition to materialize, such as maintaining transparent and orderly financial records.

To an investor, an exit strategy acts as one of the key incentives to invest in your start-up!

Typically, an angel investor receives equity in return for her investment. Thus, the principal way an investor can reap returns is if your company is sold at some point.

Investors, akin to entrepreneurs, are striving to turn a profit. Hence, it's understandable for them to desire a defined exit route from the onset, as an assurance that you're factoring in their interests too.

Admittedly, a majority of start-ups do not survive and as a result, most investments don't yield substantial profits. However, chasing a profit remains an investor’s singular rational motive for investment — regardless of the extent of their faith in your vision — and it shouldn't be disregarded.

For a founder, the start-up is akin to a child they’ve nurtured and through which they aspire to better the world. However, to an investor, despite potentially playing an active role in mentoring and advising, the start-up isn't hers.

Ultimately, every investor hops on board with the intent of cashing out at some point. It's crucial to reassure the investor that you comprehend this and are making concerted efforts to facilitate it!

In conclusion

The primary takeaway from this book:

Angel investors extend beyond being mere financiers — they can offer start-ups invaluable insights, seasoned wisdom, and lucrative networking possibilities. Captivating their interest requires connecting with them personally and shaping a company that considers and respects the investors' stakes.