founders

Hints and tips for founders getting started with angel investment

awaken-angels-1

I’ve spoken on this theme a few times lately.  First for the GMIT Empower conference back in September & more recently for Republic of Work in Cork at their weekly lunch and learn.  It’s an interesting topic because raising investment really is one of those lessons that isn’t easy to learn from a text book.  Of course there’s loads written about the process and how to go about it … but in truth the hardest part of all is finding the right investors in the first place, right at the very beginning.  And this can be a bit of a dark art.  Why?  Well because a lot of it is about people, and as everyone knows, that’s always the trickiest part of any business transaction.

Angel investors themselves tend to be either very well known or completely hidden away.  You’ll all know the famous ones who are prominent in whichever city or county you happen to live in.  Some of them are full time & professional angel investment is all they do and they approach it very much like a job.  They’re active in the angel networks (like HBAN here in Ireland) or they’re members of the UKBAA or EBAN or the like.  They welcome approaches from founders & may well advertise or promote how they want you to engage with them.  Maybe they’re connected with one of the accelerator groups and you can access them via that route.  They’re clear about what sorts of companies they’re interested in investing in and may even publicise that information.  If you fit their profile then you’re golden and Bob’s your uncle – it’s a fairly clear path & they’ll either like your proposition or they won’t.  If they like it you’ll either agree on a valuation and investment terms or you won’t.  If you like them and what they bring you’ll either take their money or you won’t.  Job done.

In truth many of those well known angels tend to invest in the same types of companies that are already in the accelerators and on the government programmes and marked out early doors as companies with high potential for rapid growth and on a pre-defined trajectory to investment.  They tend to move in the same circles as the VC firms and they all know the same people.  It de-risks everything for them as the companies have already been through the mill in terms of copious amounts of expert due diligence performed and money is being thrown at them from all angles.  Often it’s a lot about tax breaks and managing their portfolios. 

But what if you aren’t one of those companies?  What if you don’t move in those circles?  What if you’re very early stage?  Then where do you start.

Again, like most things in life you start with your network.  (As an aside, if you’re an entrepreneur or a startup founder and you’re reading this and realising that you don’t have a network, you’re in serious trouble and you need to take speedy affirmative action.  That’s a blog topic for another day.  As a quick fix, buy Kelly Hoey’s book “Build Your Dream Network” and read it immediately).

As a founder or entrepreneur you will probably be part of a number of networks with other similar founders.  I would start there.  But before you do that, pause and have a long hard think about the sort of investor you’re looking for.  Do you want dumb or smart money?  Do you want to use this as an opportunity to bring expertise onto your Board and into your company?  Are you looking for someone that’s well connected into the investor community who will be able to bring in your next level of investment when you’re ready for the big cheque?  Do you want someone who has successfully sold their own company and might be able to help you do the same?

Remember that angel investing is a team sport and you only really need to find the first appropriate investor & convince them that you & your company are interesting & a good bet.  If you can do that, they will likely bring their friends.  When I look at my own investment portfolio, in 7 of the 10 companies I’ve invested in I’ve brought other investors in with me who didn’t know anything about those companies.

Once you’ve identified your ideal investor or investors, draw up your long list … and then make a start on your homework.  Against the names on your list you will need to research the following as a minimum:

  • Is the angel actively investing currently?
  • If so are they looking at new investments or focusing only on existing portfolio?
  • Do I meet their investment criteria? (For example, I have 3 criteria before I’ll usually even look at an opportunity – has to be female founders, tech for good & something I can add value to)
  • What size of investments do they usually make?
  • Do they invest alone or as part of an angel network?
  • What other investments have they made in businesses similar to mine?
  • Does the person welcome cold approaches?
  • If not, who do I know who knows them?

You can avoid this step by pitching to the angel networks.  This may save you time.  It may also result in you missing out on some of the more niche (and maybe appropriate) angels who aren’t part of the networks.  You will also be at the mercy of the angel network’s timetable in terms of pitch dates, pitch format and so on.  It’s perhaps worth mentioning that whichever of these paths you start with, there’s a good likelihood you’ll end up doing a bit of both routes.

Pitching to the formal networks saves founders a lot of time and legwork.  The organisers are super-experienced and may well help you get investor ready, explain the enormous amount of jargon that surrounds business investment, finesse your pitch & business plan, guide you in terms of the forms of investment itself that are open to you (it’s not all straight equity any more), narrow down your valuation range … some of them even do all the paperwork.  However, for some types of business they may not have many of the right types of investor in the network and this can lead to founder disappointment when no tangible interest materialises and a feeling that time has been wasted.  Weigh it up and have the conversation with the organisers of the angel network.  They’ll be keen not to waste their own time either.  Final point on this – there’s no guarantee or obligation on them to even allow you to pitch so this route may simply not be available to you for any number of reasons.

I’m going to pause here for a moment to cover off how I believe you should go about contacting angel investors for an initial conversation.  This is completely & utterly my own opinion.  I mentioned earlier that many angels welcome cold approaches.  I don’t and these are just a few of the more common ways that people I’ve never met or spoken with contact me:

  • They email me cold & include their pitch decks (& often bizarrely add a note to say if I’m not interested can I forward their deck onto others in my network who may be … WTF … dream on)
  • They send me Twitter DMs with a link to their pitch deck
  • They include me in desperate scattergun cold approaches via LinkedIn
  • They corner me at in-person events and try to pitch to me

When this happens my response ranges from deleting the email & ignoring the person to offering constructive advice to just plain being blunt or rude, which I don’t like to be.  None of these methods will ever result in me investing in that founder’s business and I say that with 100% certainty. 

I generally only have initial conversations if the founder comes to me via a structured introduction from a mutual respected & trusted contact.

I’ll leave you today with three pieces of advice and 3 pitfall areas for anyone who’s fundraising or about to start.  Advice first:

  1. Start looking early.  Start the process way before you think you need to.  There’s a lot you can do to get ready but the main activity will be building your network, starting to make connections and having early conversations.  Your first fundraise will likely take 6-9 months but it often takes longer and false starts are fairly common.
  2. Do your homework.  On investors as mentioned above but also in terms of your own prep.  Decide on the sort of investment you are seeking.  Go online & watch as many others pitching as you can.  Learn the jargon.  If you’re not an accountant, learn about balance sheets and cap tables at least so that you understand why investors are interested in them.  Think about your valuation and how much equity you’re prepared to part with.  On this, expect valuations to be under further pressure as the Covid period extends again (I’ve heard of term sheets again being rescinded in the last few days since more national lockdowns have been announced).  Start working on your pitch deck early as it will go through a lot of iterations.  Before we leave this point, make sure you’ve accessed all the free money (i.e. grants) that you can.
  3. Raise enough.  Especially now.  The process of raising in itself is extremely time consuming and a serious distraction to business as usual.  And who knows what the world will look like in 12 or 18 or 24 months time.  Watch out for tyre kickers who will talk to you until the cows come home but never get any closer to investing.  One of you needs to pop the question during this type of long courtship.  I heard last week that a number of funds are no longer doing smaller investments of less than £1m.  This trend is likely to spread & really early stage money is likely to get more & more scarce … so if you’re thinking about fundraising real urgency does exist.

And now some pitfalls:

  1. Don’t let the process go slowly because you aren’t prepared.  Get your due diligence documentation completed early and in order.  Business plan in the correct format and split into chapters, labelled & ready to send out to anyone who asks.  Share register clear & up to date with no anomalies.  Customer contracts in order & available, financial information up to date and company filings done.  Forecasts available in detail and ready to answer any questions on the underlying assumptions.  Board minutes written up.  No last minute surprises.
  2. Giving away too much equity too early or to the wrong investor/investors.  This will either put future investors off or maybe cause you a lot of heartache/embarrassment getting those shares back off a friend or family member who helped you out early days but doesn’t add much going forward.  Really do your homework on investors, and not only angels but VCs too.  Talk (as in speak, not email with) to the founders of other businesses they have invested in & ask if they delivered what they promised and find out what they’ve been like to work with.
  3. Not being prepared for the change that will occur post investment.  You may still be the figurehead but the company is no longer all yours.  Maybe things were very informal previously but now have to be more structured as you have investors that you’re accountable to.  Over time they may even decide to replace you although you will still own shares and make money when they company is sold.  You may decide to replace yourself.  There are many examples of both of those events happening.  This links back to your reasons for starting a company in the first place and is a little reminder from me that investment shouldn’t be rushed into or taken lightly.  Sometimes it’s better not to take it at all.

That’s all for today folks.  If you’re raising & would like a slightly different perspective from a founder who’s raised recently, then I recommend watching this video from Cerebreon’s co-founder Gillian Doyle recorded at August’s AwakenHub event.  20 minutes long and more useful than most MBAs.

Please do post any questions in the comments and I will attempt to answer them all & thank you for reading.  If you enjoyed this blog then please do share with your own networks.

Angel investment from this rookie’s perspective

Beautiful carved wooden angel - photo by Wolfgang Moroder

Beautiful carved wooden angel – photo by Wolfgang Moroder

“I saw the angel in the marble and carved until I set him free” – Michelangelo

Last month I made my first angel investment. I know many of my blog readers are entrepreneurs and startups and some of you are or will be seeking angel investment, so I thought it might be useful/interesting for me to jot down (from a poacher turned gamekeeper type of perspective) for you a few of the choices I’ve made along my own personal investment journey and why – in case it helps you.

To set the scene I’ll start with why I’m doing a small number of early stage angel investments in the first place and what my criteria have been. My main objective was to eventually select a handful (my final number is three) of early stage startups where I liked the idea but more importantly liked the founder or startup team. My motivation is to use some of what I’ve learned starting and scaling my own businesses in the past to help a small number of other people get through their early growth stages less painfully than it was for me. If I make any money along the way, I’ll celebrate that as a bonus. Making money is not my primary objective – which is lucky because many of the wise heads I know have gleefully warned me (a few of them several times over) that it’s impossible to make money by investing in early stage startups.

A couple of other bits of info make up the full picture. Although I’m a member of a couple of formal angel networks, I haven’t invested through them or as a part of any of their syndicates. So far anyway.

Finally, the startups had to be somewhere on the spectrum of my own areas of interest so that I can add value. This inevitably means software, X as a service or platform, community, scaleable, public sector, always something to do with people and how they can save time or money by collaborating, learning from each other or working together.

I’ve been talking to startups for years. It’s a natural part of what all entrepreneurs do. For me the night out that will always trump all others is one where I can watch other startup entrepreneurs pitching. I just love that initial rush of thoughts about another person’s ideas – working out the angles on the business models and the commercials…seeing if I can spot some opportunities that they’ve overlooked. As an aside, I love it even more if it’s something I’ve considered doing myself in the past but haven’t been able to work out the commercials or the logistics and then someone else manages to do that (for example, Northern Irish startup Send My Bag).

As a seasoned and successfully exited entrepreneur, people seek me out anyway for all sorts of reasons. Because of this it was fairly easy for me to start about a year or so ago to assemble a long list of 20 or so potential investee companies and kick off an initial conversation with the founders as a way to start my selection process.

This is what I was considering:

• Do I like the product or product idea and am I convinced it can scale?
• Would I buy it myself for my own (theoretical) organisation to use?
• Is the founder credible, articulate, stable and sensible but with a dollop of sparkle?
• Do I like them enough?
• Can I see myself working with them over the next 3-5 years?
• Are they resilient enough to keep things moving forward when times get tough and do they have the grit to sack bad hires quickly and stand up and fight for themselves and their company when they need to?
• Are they well-informed about their competitors and the way the market is moving?
• Can the founder front the business; are they likeable and convincing without being arrogant and smartass?
• Is their company valuation reasonable and realistic?
• Do they have a good overall grasp of what their next 2 years looks like in terms of back of the envelope targets, resource requirements, funding, effort needed, team, etc?
• Is the founder generally on top of their workload and easily able to articulate key messages and information?
• Are their targets and forecasts reasonable or complete pie in the sky?
• Can I clearly see how I can add value to both the founder and the company?

It took me a while to put the above list together as I’ve never written it down before. In case you’re wondering – yes – it is more or less in order of importance to me. I did say this blog was going to be about my own personal investment journey…

Only companies that passed the first 2 questions made it onto my long list of 20 companies in the first place and then between June and December last year I whittled those original 20 down to 3. I guess where it gets interesting is how I did that. I’m afraid it isn’t scientific for anyone who’s expecting a checklist and a spreadsheet.

A few fell at the valuation hurdle. If all you have is an idea and you don’t have any product built or any customers, your company in my eyes is not worth £1m. Simple as.

A few others fell by the wayside because of the founder. The trick here is to keep meeting with them until you’re either convinced that they’re the real deal or until they let their guard down and expose themselves to be anxious, needy, deluded, arrogant, ego-driven, greedy, selfish, brattish, indecisive or any of the many qualities you as an investor don’t want to see in a startup CEO or leader.

Some over time I just had a bad feeling about, or something told me that the founder wasn’t 100% honest – I could just feel it wasn’t good when I scratched the surface.

Others I lost because a few months in the product was no longer holding up or it became apparent that the founder wasn’t able to move at the pace required to get to market within their window of opportunity.

A couple went because the founder had more than one focus and it became apparent that they were spread too thin and weren’t giving any of their projects the attention they deserved.  A couple more because the founder knew it all and wouldn’t listen to any advice from me or from anyone else.

And so I was left with three – which was the number I was hoping for in the first place. Two of “my” founders are female and one is male. They all share a number of important qualities and despite their differences they’re remarkably similar.

This blog is part of a short series and I’ll write about the companies themselves next time around.

If you have any questions please ask them in the comments section below and I’ll do my best to answer.