Forbes on Essentials for Attracting Angel Investors

Great article on essentials for raising angel funding.

Forbes.com
Deep Pockets
Ten Ways To Attract Angel Funding
Martin Zwilling, 10.27.09, 6:15 PM ET

The papers are filled with scary statistics. Here are a few more for entrepreneurs on the hunt for capital from angel investors--those loosely banded groups of deep-pocketed individuals looking for the handsome returns that only risky, early stage investing can (sometimes) bring.

According to the latest data from AngelSoft, which pairs entrepreneurs with angel groups in a particular city or ZIP code, only about one out of 100 companies that make a formal request for angel funding manage to secure the capital. Among the axed, three-quarters never make it past the initial screening process; of those that do, more than half are eliminated during live presentations and discussions, and another 10% during the following due-diligence process.

It's a brutal gauntlet.

While there are no guaranteed strategies for success, you can boost your chances of survival. Over the past decade, I have had the opportunity to see how the process works, several times from the start-up side, and more recently from the angel perspective (as a member of the selection committee for the Arizona Angels Investment Network, in Phoenix).

Here is my list of the top 10 action items for those looking to land angel funding. If some of these are familiar, ask yourself: Are you actually doing something about them?

1. Incorporate your business now. If you expect to seek external funding, first incorporate as an S-Corp, C-Corp, or a limited liability company, rather than the more expeditious sole proprietorship or partnership. Corporate entities allow for easy carving up of equity stakes, one reason why unincorporated entities often can't find funding.

2. Line up an experienced team. There's an adage: "Investors fund people, not ideas." Not only is this dead on, poorly assembled teams are probably the biggest stumbling block in the initial angel-screening process. If the founders are not experienced, find a couple of advisers who are experts in your industry to fill the gap.

3. Launch a Web site. I don't care what kind of company you are, in today's world, you need a cleanly designed, easy-to-use Web site. If not, you won't be perceived as a real company. Investors routinely troll sites of companies looking for capital to get a feel for their tone and scope, as well as the nature and maturity of their products and services. Also, protect that virtual real estate by reserving the company name on social-networking sites.

4. If you have real intellectual property, defend it. File patents and trademarks. They may or may not be true barriers to entry (first-mover advantage can be more powerful than any patent), but they are often perceived as such. Start the process early, as it takes a while to pound through. (Note: Patents can run the gamut. For more on this, check out "Ten Of The Zaniest Patents.")

5. Build a prototype product. Many entrepreneurs need capital to build a prototype product, yet most angels expect to see a prototype before they invest. Do what you can to demonstrate progress early.

6. Hit the high notes. At the initial screening, investors expect a one- or two-page summary of the business, including an explanation of how it makes money and how specifically you would invest an angel's capital to boost your prospects--all backed up by a streamlined 10-slide PowerPoint investor presentation. Remember to aim the content at investors, not customers. (Translation: Don't spend too much time gushing over every last product detail.)

7. Prepare an investment-grade business plan. All entrepreneurs need a well-crafted business plan for their own use, whether they intend to seek investor funding or not. As a founder, you may think that everyone understands your vision based on your words and passion, but it doesn't work that way. A good business plan should answer every question an investor or associate might ask. For a breakdown, check out "10 Elements Of A Sound Business Plan."

8. Finalize your financial model. Like the business plan, a financial model is required as much for your own use as to impress angel investors. In most cases, an interactive Microsoft Excel spreadsheet is adequate, with projections (and well-defined and denoted assumptions that drive them) for revenue, expenses and cash flow over the next five years. Best-, expected and worst-case scenarios add credibility.

9. Close at least one customer. This must be someone who is willing to pay real money for your product or service. Free trials don't count. All the conviction and market research in the world are no substitute for real customers paying real money.

10. Network--ahead of time. This last item should be your first: Build relationships with investors and friends of investors before you need their money. Start by taking an active role in relevant technology groups, trade associations and university functions.

I hope the takeaway is clear: Angels can be saviors, but not without plenty of careful preparation. Don't expect anyone to swoop down, gather you up and whisk you to financial freedom. For more on raising angel funding, read "Wooing And Choosing The Right Backer."

Martin Zwilling is the founder and chief executive officer of Startup Professionals, a company that provides products and services to start-up founders and small business owners. He can be reached at marty@startupprofessionals.com.