How To Raise Funds From Angel Investors and Venture Capitalists.Entrepreneur MBA Podcast 3.12
Summary: In today’s podcast episode, Stephen Halasnik and his guest Chris Saxman discuss how to raise funds from angel investors and venture capitalists. When first-time businesses or existing businesses are looking at how to raise funds, they look for potential investors. Accredited investors are those investors who have a special status granted to them under financial regulation laws. Some conditions must exist in your company in order to approach angel investors. First, not every business should be raising funds, and business people and owners need to have an understanding of the type of business they have, and what the appropriate equity financing mechanisms are for that business.
Looking at a quick overview of angel investors, there are hundreds of thousands, if not millions of them. Every investor is different, based on their own personal needs such as investing with their friend’s company, writing one check, and being done. Other investors get interested in multiple companies, writing large checks and getting involved with the company, management and possibly even providing mentorship. It is important to do your due diligence when researching potential investors.
Being an individual investor can be hard to manage at times, so angel groups were created. These groups are formed by teaming up with other business people and sharing the investment work, so not a lot of pressure is solely on one person. Angel investment should typically be done on a portfolio basis. The more companies an angel invests in, the lower the overall portfolio risk, and engaging in more investments will raise the portfolio risk and create a lot of work. This is where the angel investment groups can come into play to help with the diversification of the portfolio and spread out the responsibilities. You can apply to angel investment groups online.
The Angel-funding route allows you the time to produce the product. As an investor, you do not want the CEO or founders to be distracted by financial struggles to the point that they lose focus on the business. The investors, founders, and co-founders can negotiate the minimum they pay themselves.
Venture capitalists and venture capital firms are professionals or a group of professionals who manage other people’s money and use it to make investments. Venture capital firms may be getting their capital from limited partners. Limited partners invest money with venture capitalists in exchange for equity or part ownership of the business. Venture capitalist firms can range from a small business with small funds and only a few people, to massive organizations that manage a large amount of money with many employees. Some venture capitalists will only focus on early-stage startups, while others focus on startups in the later stages. Venture capitalists may stick around with startups for the full process, from early on through later stages, but this often becomes a large workload.
A start-up is a temporary collection of people that have come together to discover a scalable, repeatable business model. A startup’s initial capital may come from crowdfunding platforms or outside investors. If the business model is well established, then angel investors may not be interested in the investment. This is because angel funders do not make their money until there is some type of exit or someone comes in and buys the company. Angels who join startups in the early stages take on a large amount of risk. Great angel investor options for startups or those who want to invest include Angellist and Angel Capital Association, as they both help startups, angel investors, and job seekers looking to work at startups.
The first rule with a startup or a new business is always to make sure you are controlling your capital, you do not want to run out of money. The company is now living off of possibly an individual investor’s own money for a long time. The business will be raising money in rounds, and so the question of how much money should be raised in each round comes about. The business needs to raise enough for a “pivot and a half.” So, let’s say the business closes around today and then they can do whatever actions are needed. However, they could discover that their calculations were wrong or failed to meet their goal, so now the management team has to pivot the business to do something else based on what they learned from the first wrong idea. Businesses want to make sure they have money in the bank for when situations like this occur. With new companies especially, there will be many moments of ups and downs where the business will be doing well or where the business is running out of money.
In any new business model, business owners and the management team cannot predict exactly how much revenue the business will make. Since clearly, the business does not want to run out of money, it is important to have a “cash-out tool.” This tool is a way to set projections that will help the business to see how much money they need to raise. This document should be updated every week since it is used to manage the business, but it is an internal document meaning you do not have to show it to investors. You can control how much you spend. This can be anything from paying your employees to your office costs. First, you have to figure out the minimum amount you need to spend to hit the next milestone for your round. Once you get a number set, you have to be committed to that number so that investors know. Next, after you make some more money you must figure out what you are going to do with that money. You can set a maximum amount of money, which can lead to money in the bank no longer going towards helping you reach a goal. After you have this minimum and maximum set, you can present it to the investors. This will show the investors your thought process, your concern towards financing risks, and that you will be thoughtful of their money.
Guest Speaker: Chris Saxman, Board of Directors of Nymbl Science and mentor for Techstars
Chris has more than 30 years of experience as a serial entrepreneur, financier, and C-suite executive, with an extensive background in founding, building, and investing in companies, raising capital, and developing and implementing corporate strategy. Currently, he serves on the board of directors of Nymbl Science and is an active mentor for Techstars. Previously at CirrusMD (a leading telemedicine firm), he was instrumental in developing new value-based business models around virtual care for large payers, employers, and integrated delivery networks. Before joining CirrusMD in 2014, he built two tech-enabled startups in New York City. He also has extensive experience investing in tech startups through AIG’s private equity arm, New York Angels, and Rockies Venture Fund. He is a leader of the digital healthcare community in Colorado and nationally. He received an MBA in Finance and Economics from NYU Stern and a BA in Economics and Government from Cornell University. He lives in Louisville, CO with his wife, young daughter, and Australian Shepherd.
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, an A+ and 5 stars rated BBB company since 2002, is a direct lender that provides lines of credit to small businesses and nonprofits.
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.
Note: Financing Solutions donates 10% of its profits to various nonprofit charities