It’s a fact of the business world: startups need money. If you’re launching a new business and you’re looking for some serious financial backing, you might want to seek out some angel investors. Angel investors are individuals or groups who invest their own money in early-stage companies with the hope of earning a substantial return on investment down the road. Studies have shown that startups that have the backing of angel investors are more likely to survive and thrive.
That said, these investors aren’t simply going to part with their money because they like you. It obviously helps if they believe in you, but ultimately they want to feel confident that your company is a smart investment. To convince them to take a chance on you, you need to come in prepared. Here are six key things you should do before making your pitch.
- Make sure you have a strong business plan.
The first thing a potential investor wants to see is a well-thought-out business plan – not just to learn what your company is about, but also to demonstrate that you’ve done your homework and you have a path forward. Your business plan should outline your company’s goals, revenue model, target market, and competitive landscape. It should also include a detailed financial analysis, explaining how you plan to use the investment funds and what kind of return on investment the investors can expect.
- Do background research on the investors.
Before approaching anyone for funding, it’s important that you know as much as you can about them. Learn about their investment history, portfolio companies, and areas of interest – the ventures they’re most attracted to. You should also try to get a sense of their personal investing style and risk tolerance. The more you know about the investor, the better equipped you’ll be to make a pitch that appeals to them.
- Have a solid team in place.
Investors are not only looking for a great business idea; they’re also looking for a great team to execute it. Before approaching investors, make sure you have a core team in place with the skills and experience necessary to bring your vision to life. In addition, try to get some early traction on your business idea – preliminary results can be a great proof of concept. This will show investors that you’re serious about your startup and increase your chances of getting funded.
- Be prepared to give up some equity.
Investors are not going to hand over their money without getting something in return. In most cases, you’ll have to give up a portion of your company’s equity in exchange for the investment funds. Before approaching investors, be prepared to give up a significant amount of equity – and more if you raise multiple rounds.
- Have a clear exit strategy.
Investors are looking for a way to make money from their investment, and one of the most common ways is through an “exit.” This usually happens when the company is sold or goes public. Before approaching investors, make sure you have a clear exit strategy in place for them. This will give them confidence that they’ll be able to get their money back – and then some – down the road.
- Draw up a detailed contract.
Investment deals can be complex, so it’s important to have a thorough contract in place that outlines the terms of the agreement. This contract should include the amount of money being invested, the equity stake being taken, the rights and obligations of each party, the repayment plan, and the exit strategy. Vagueness is your enemy here and can open the door for disputes or even lawsuits, so be meticulous with the details. Your investor will want to review the contract and will likely recommend some changes, so you’ll need to be open to that – but having at least a detailed “first draft” will show investors you mean business.
Most importantly – never enter into a contractual agreement or accept money from an angel investor without the advice and counsel of a skilled attorney, preferably one who understands the needs of startups and the legal requirements involved in taking investment from third parties. At Hood Venture Counsel, we focus much of our practice on helping startups protect their interests, and we can assist with drafting contracts, contract reviews, and negotiating terms with angel investors, among other things. To learn more, contact us today.