Over the next couple weeks I’ll have multiple posts on this topic since it’s a popular one amongst Entrepreneurs. I’m not quite sure where to start with “Pitching to Angel Investors” so I’ll just dive in…
To be blunt, a large percentage of people I speak with have ZERO chance of raising money from investors. There are dozens if not hundreds of reasons why this is true but one big reason is the lack of any possible and substantial return of capital for the investor (99% of Angel Investors want to make money, they are not Philanthropists in this aspect of their lives).
Raising money from Angel Investors is hard and can take a long time. Angel Investors are usually successful entrepreneurs or business executives with very high standards for excellence. They want to invest in the best people, with the best ideas, in the biggest markets with the greatest potential for success and big returns. This means you better find a way to stand out and be memorable. Angel investors might look at 150-250 startups per year and invest in 10-15 of them (sometimes less).
Ask yourself: Why are you different? Why are you better? Why do you deserve their money? How will you build a bigger company using their money?
Remember: Ideas are common, great execution is rare.
Angel Investors know the timeframe for seeing a return on their investment might be 3-8 years (depending on how the deal is structured and whether future investment rounds provide some cash outs or an exit event occurs). However, if you think a 10% annualized return on their investment is enough to get them interested than you are 100% wrong. In order to pitch Angel Investors you need to understand the financial metrics of an investors portfolio. If an Angel Investor makes 10 investments into startup companies they understand 3-4 of those companies might return their initial investment, 3-4 of those companies will fail miserably and be worthless, and 3-4 of the companies might return more than their initial investment with hopefully 1-2 homeruns (if they’re lucky). A homerun investment might mean putting $50k into a startup and getting $2 million out in 3-5 years (very rare, but it does happen on occasion). This simply means the 3-4 successes or the 1-2 homeruns have to make up for all the other losers. Maybe this doesn’t sound fair but it’s the truth so deal with it otherwise don’t approach Angel Investors. In order for the winners to make up for the losers, the Angel Investor needs some of his/her portfolio companies to make 10-20x or more on the initial investment (10x = $25k in, $250k out or 20x = 25k in, $500k out).
I’m not saying you have to go into every pitch meeting or email exchange with an Angel Investor and always know the exact revenue model for your startup or predict how much your company could be worth in 5+ years but typically small ideas in small markets don’t get funded.
The point I’m trying to make is that you need to examine your startup’s business model and the future growth potential. If your startup is a lifestyle business that hopes to grow at 15-20% per year in good economic times than that is not a company that Angel Investors will have any interest in. I get dozens of emails every week from some great, passionate, determined people, but their companies are not fundable because the potential for a big return just doesn’t exist. If you’re launching a local cupcake bakery or an event planning business and need $50,000-$100,000 to get started… these are not businesses that any Angel Investors will care about so don’t waste your time pitching to them. Your time can be better spent finding funds elsewhere such as… friends and family, crowdfunding sites like Kickstarter or IndieGoGo, banks or credit cards, cashing in your retirement accounts, applying for small business grants or getting LOI’s from potential customers or distributors (letters of intent = this could help secure funding from many sources just mentioned).
Reality check: Angel Investors want to know your startup could be worth tens or hundreds of millions someday and their 5-10% equity stake makes them even wealthier than they already are. If your startup might worth $1 million someday, than Angel Investors are probably not your ideal source for funding. You might think you’re supplying a great business for the local community and/or providing a niche product that consumers might like but Angel Investors are big dreamers just like you and me. Of course they want to find the next Facebook or Google but until then its all about risk and reward. Big risks are usually only worth taking if there’s a potential big reward.
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