How to get the money you need from the right people at the right time.
Part One: How to find angels, what they want, inside knowledge on persuading them, how to agree a valuation, what to avoid and tax benefits to entice them in.
How to find angels: Today finding a group of Angels near to you shouldn’t be a problem, there are many angel networks run privately and through government initiatives, check the www.vcrdirectory.net for a free list. Finding the right angels is another matter so you should review their websites – angels often prefer ‘local’ investments and then they tend to invest in what they know so check the ‘sectors’ of interest to them.
Using third parties to raise funds: an option when trying to raise funds is to use a third party to help you; these can be very helpful but choose carefully and negotiate any deal terms. Try to avoid warrants as many investors will not like this later. Also, check that you don’t pay twice if they raise angel funds via a group. Any third party that charges a large up front fee should be avoided.
What angels want: Angels come in many guises but they tend to fall into several categories as described in part two. However, for the most part they are looking for a big win and fast – no matter what they say! They are ‘gambling’ and they want to win big relative to their investment – so ensure that you are offering a big enough carrot – 8 times the original amount
invested in three years is a good carrot.
Inside knowledge on persuading them: Like any gamble the ‘game’ is all about confidence – investors like to give money to people who appear confident in their ability to deliver on their promises. It is selling of the highest order that is required. You need to be able to show a great idea, team, market and many other positive factors along with an unbreakable will
to win. This will come across in everything you say and do – good angels can ‘smell’ it, so ensure you consider this when pitching. They will also want to see you investing your own money as well as time in the business – they want confidence that you are fully ‘committed’ (skin in the game).
How much to raise and when: The eternal answer is as much as you can! However, to ensure that you don’t get too ‘diluted’ over time you should aim to consistently raise funds at higher values as you need the money or meet a significant milestone that raises the valuation, say every 18 months from start-up. So careful planning is required and often
you can be limited by the available resources i.e. the max you can raise is usually £500K from an angel group. Always get more then you think you need and start looking three months sooner. It usually takes six months to raise money outside ‘friends and family’ and requires a huge amount of effort and time.
How to agree a valuation: this is a thorny issue and there are many views that are explored more fully in part three. In short, the price you sell your shares for is up to you. Before you price them you should do a great selling job and have investors ‘champing at the bit’ then negotiate. Don’t be forced into any stereotype view on how to value a business, do a
deal that suits you. It’s important not to undervalue the business and lose significant ownership but it’s also key not to price too highly to turn off investors or suffer a ‘down round’ in the future. Investors like to see gains in value over time; try to look to increase the price with subsequent sales of shares.
What to avoid: The two key things to avoid when seeking and securing angels funds are too many angels, you don’t want to manage a huge group of shareholders believe me, and timing – you must leave enough time to do the deal in your time otherwise you will be squeezed on the deal terms as you get desperate for cash. Part two covers the key issues about angels themselves,
it’s essential to get the right angels or you will pay a high price.
Tax benefits to entice them in: Another key for most investors is the benefit of some sort of tax incentive. In the UK the EIS scheme allows investors to ‘roll over’ tax liabilities as an investment with significant advantages so check if you are included under the EIS scheme and advertise the fact if you are.