Angel and VC Funding for Small Businesses: What They Will Be Looking For. Entrepreneur MBA Podcast 2.9
Summary: Early-stage startup business owners typically have a dream or an idea that they can not support with their own money. An angel investor could get a business the funds it needs to expand and excel in the market. However, there are a lot of factors to consider when deciding to pursue an angel funder or venture capitalist. Planning out these requirements in advance will allow for a smooth journey with these accredited investors.
Today’s topic: What Angel and VC Funders Look for in Small Businesses
There are many people who believe their business is right for angel funding, that angel funding is the only way to start a business, or they do not know what angel funders or Venture Capitalists (VCs) look for in a business in order to provide services.
An Angel or venture capital funder helps a CEO achieve its business plan financially. There are requirements that have evolved over time for the recruitment of Angel and VC funding. The industry is very mature, so there are bullet points that everybody needs to hit, and if you do not they are major dealbreakers.
Dave’s Professional Background
Three out of four of David’s companies were involved with all different sorts of funding. These funding resources ranged from friends and family, to venture capitalists, to strategic investors from other companies that were in the industry. The fourth company is doing well and is projected to make about $20 million in revenue, so there is no need for any type of angel investment.
Normally, in David’s career, he joins a company as part of their professional executive team immediately before they started looking into financing or immediately after they have had their first financing. It becomes his goal to work with the new CEO, who was frequently not the founder, put together a plan, get to know the company, obtain funding, and scale the company.
The Role of an Angel Investor
Angel investing is a tough business. If you are thinking about angel investing, you must have the bankroll, time, and commitment to do at least 10 investments. If you model up a portfolio of 10 investments, 7 to 8 of those are going to bring you zero return on investment. You can make up for that loss with the remaining 1 to 3 investments that were successful. These investments would need a high return of at least 30x the initial contribution of the investor.
Angel funders want an exit strategy of some sort, in which either a venture capitalist or VC firm, private equity company, or a strategic acquirer will buy out the company. These wealthy individuals want to cash out a big multiple on their initial investment, similar to the stock market perspective. Angel funding presents its return through a high growth curve with a big-equity return as opposed to the slower growth curve with a nice dividend deal.
If your company is involved with equity investments, the assumption is that all of the money the Angel gives you gets reinvested back into the company over and over again. If there is any leftover cash flow, the business owners and Angel funders do not get to pay themselves, the business gets it all. If the money goes into the founder’s pocket, it is not helping the company in any way. Angels might allow the business owner to cover some debt but they will certainly not let them put money in their personal account. Their goal is for the company to grow and scale to a point where a VC will want to buy them out.
There are angel capital associations, equity crowdfunding, and accredited investors all throughout the United States where you can make a pitch presenting a business opportunity for them. This will typically be done in front of a screening committee or board of directors. They will undergo a decision-making process to determine if your business proposal has potential.
Angel Funding Requirements
First, you need to consider the following: What kinds of return is the investor looking for? What is the area of expertise of the investor or investor group? And what type of deals do they do? Then, decide if you fit their business angle or not, otherwise, you will end up wasting a lot of people’s time. The most important aspect to consider is expected return, in which this math will help you establish what you need in order to be happy with your investments.
If your business does not have the potential to get to $20 million in revenue or even $50 million, your business will not be of any interest to a professional business angel. At this point in your business, you are better off not going down that road and convincing them that you can. If your business return does not turn out to be as great as you promise, in the end, you will be the one who will lose the most.
If your start-up business is having a hard time finding a secure base, you may need to pivot your focus. Pivoting is when your business begins in one area with a strategy and you either alter it because what your business is doing is not working, or you learn something new and you pivot into another area because of opportunity. New businesses commonly pivot because they learn that their original idea is not going to work out as expected. These changes may include going into new markets with their existing product or creating new products. The big goal is to open new verticals that are going to extend your market presence and bring in more revenue.
Experience with Investors
David has used both angel funding and capital funding in his businesses before. His first deal was a great learning experience for him with two angel groups in Southern California. If you are a small company pursuing angel group financing, be prepared to commit a lot of time to investor management. David obtained funding for his business through crowdfunding, where 27 to 30 angels get signed onto the deal. When it came time for the quarterly board meeting, which is always a high effort experience, a lot more preparation was required for tasks like getting proxy statements and signatures on documents, putting every investor’s opinion into consideration and answering more questions. Eventually, it got David what he needed, but his angel investment experience was noted as more complex than working with a venture capital firm.
Hiring a management team or individual would take the duties of communicating with every investor, hosting the meetings, and keeping every party updated with major focal points so that the business owner can continue focusing on the business’ operations.
3 Biggest Mistakes Made When Needing Angel Funding
1) Having Nothing to Offer to the Investor
The most common call that David gets is: “How do I get financing?” Business startups typically miss out on fundraising opportunities because they overlook the required due diligence of understanding what angel investors want. These high net worth individuals are looking for startup companies with a product-market fit, meaning that you have good customers that want to buy the product or service you are selling, you understand the competitive market very clearly, you have the right team, and more.
Most times, banks will not finance your business idea with a small business loan because it is too high risk and there is not enough collateral and cash flow. Through the valuation process, the bank may deny a small business’s request for financing so these business owners are forced to look into other funding sources or lines of credit. However, if you do not have a full understanding of where your business stands and its growth potential, an external lender will not consider your business proposal.
2) Not Thinking Far Enough in Advance
A business owner must assess where their business is at and where they want the business to go. If you have plans to possibly sell your business, review the relationship between revenue and profit in advance. You then have to identify why investors would be willing to own your business out of all the other investment opportunities that come their way. Of course, the business needs to be worth the selling price, so being able to plan ahead to structure your business with a profitable outlook will aid in the buy out of your business.
3) Having a Poor Analysis of the Competitive Market Place
There are many questions that potential investors are going to ask really early in any investor pitch. They are going to tease out how successful your business development has been so far and your future vision to prosper in the market. You will have to explain and analyze your competitor’s current position in the market and how you will sell your product or service against them. The startup funding will be impossible to get if you do not express a determination and a plan to be the best in your industry’s market.
Executing Your New Business Idea
The younger generation tends to believe that the only way to start a business is through angel funding instead of through existing cash flow. Stephen has built his businesses by reinvesting his cash flow. The decision to work with your original cash flow depends on the initial idea of the business. If you want to go into software, but you are not an engineer by trade and you can not build your beta product on your own, you either need to hire an engineer to do it or find a business partner who could do it.
Stephen’s business partner has found an effective strategy to test the competitive market before investing tens of thousands of dollars of his own money into a failing idea. He usually builds a website for the product or service even though he does not have a product or service ready just yet. He will commonly make a statement that it is coming out in six to twelve months to see if traction for the product or service is gained through the analytics of his website. Most people are able to pick a product or service that they want to sell, however, they do not know how to get it into the hands of prospective clients in an effective way.
Things to consider when starting your business include questions like: how will you get the word out, how much will that cost, what is the expected conversion rate, and what is the cost of acquisition. When starting your business look at it from a sales perspective. First, see if there is a real opportunity. Then, retain all the leads that come in and lock in their future potential sales. Figure out how strong your sales market will be before you commit more money to the business idea and research development. Many times, initial funds are from friends and family, so you want to be sure you are making the right step. If you have a very successful demo sale of a product, that may be enough to get you to the table to talk to professional investors. At this point, you have most of your data including your customer acquisition cost and an understanding of your sales cycle. With meaningful data, you may be able to make a pretty powerful argument for the professionals to invest in your business idea.
Why You Would Hire David
He enjoys working with 2 profiles the most:
- Clients who are immediately pre-venture or post-venture, working to figure out how to scale and build their role in leadership through all of their challenges.
- Clients who conduct efforts to grow and evolve their team. These individuals and teams want to transform into the best versions of themselves.
About the Guest: David Labowitz
Today, I am excited to be speaking with business coach David Labowitz. Dave is a four-time small business executive, helping 3 of those businesses exit successfully while the fourth business is still going strong. Dave’s role in each one of these companies was to be the right-hand executive to the CEO. Along the way, Dave has helped raise over $12 million in equity and debt financing. Now Dave helps pre-entrepreneurs, entrepreneurs, and team leaders start, scale, and lead their businesses and teams. His career started with working in portfolio companies and new leads came due to networking with the people he met along the way.
About The Host Stephen Halasnik, Financing Solutions
Stephen Halasnik is the host of the popular, The Entrepreneur MBA Podcast. The Entrepreneur MBA podcast’s purpose is to help small businesses get over the $10 million per year in revenue mark. Mr. Halasnik is the Co-founder and Managing Partner of Financing Solutions. Financing Solutions is a leading provider of Lines of Credit to small businesses and nonprofits
Mr. Halasnik is a graduate of Rutgers University and has an Executive Masters from the MIT Birthing of Giants Entrepreneurship program.Mr. Halasnik has started and built 6 companies over 25+ years with 2 of those businesses making the Inc 500/5000 fastest growing list. Mr. Halasnik is a best selling Amazon author on business and regularly tweets about his ideas about growing a business. You can also find Mr. Halasnik on youtube talking about Entrepreneurship.
Mr. Halasnik loves small business. He lives in New Jersey with his best friend, his wife Gina. Mr. Halasnik’s number one purpose is raising his two boys, Michael and Maxwell, to be good men.
About Financing Solutions
Financing Solutions small business financing product is a great alternative to a traditional bank line of credit because it costs nothing to set up, nothing until used, and when used, is inexpensive. The credit line requires no collateral and no personal guarantees.
Small businesses use their line of credit to help with emergencies or opportunities when cash flow is temporarily down (i.e. Payroll funding)
Please feel free to fill out the no-obligation, 2-minute business line of credit application here.The time to set up a credit line is when you don’t need it so that it is ready to be used, just in case.
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