The other week, I received an email from a fellow entrepreneur asking that if I had just one piece of advice to offer someone who was looking raise angel investment for their business, what it would be. Here’s my response, which I think is helpful for anyone looking to start a company and raise financing.
Landing angel investment can be tricky. All angels seem to have their own set of requirements ranging from investment dollar amount to the market segment you’re focusing on to something even as detailed as whether you have a technology team or engineer in house. They also tend to place a high degree of value on relationships and how well they connect with you personally.
That said, there are commonalities across most angel investors and if you’re looking to position yourself most effectively to land angel investment, you need to think carefully about the fundamentals of your business model. In particular, consider how it works, why it’s unique or needed, and how the capital you’re seeking scales your business and generates a return for an investor. Consider the following four questions:
1. What’s the essence of your business model?
A unique idea is one thing, but the business model underlying that idea is most critical. It’s that nugget that lies at the foundation of your business model and is the formula for how it generates income and solves a deep seeded problem. What pain point is it trying to solve? What’s the cost structure and possible profit margin? Can you generate recurring revenue or repeat business or are you reliant on one time contracts or sales?
2. Do you have proof of concept?
Proof of concept demonstrates the feasibility of your business model and shows an investor the degree to which you have proven that your business model really works and can generate income. It can be in the form of revenue, customers or product utilization. It doesn’t need to be a lot but enough to show an investor that your business can function and has some degree of traction.
3. How does your business model scale?
Once you have proof of concept, any investor is going to want to know how the business scales. Theoretically, you’re looking to raise money to improve a product, drive more sales or acquire customers. They’ll want to know how much investment you need and how that capital will directly impact revenue and grow the business. Be prepared to have a detailed equation. For instance, a specific dollar investment leads to X incremental new customers at Y cost per customer and Z net income or return.
4. What’s the exit and potential return for the investor?
Unless you’re really lucky to find an investor who is engaged with your mission and investing because they like your business and market, most investors are looking for a tangible return on their investment. That return could come in the form of debt or equity or a combination of both. If you’re selling equity in the business rather than taking on debt, I’ve generally found investors are looking for a minimum return of 3-4 times (if not 10 in many cases) on their investment over a 2 to 5 year period. Correspondingly, you’ll need to have a concrete exit strategy. This means understanding the landscape of potential acquirers or whether an IPO down the road is possible. Be prepared to lay out your personal plans and long term objectives for the business.
Accessing capital to scale a business or execute your business idea is one of the most crucial aspects of being an entrepreneur or even running an established company for that matter. I’ve found these four questions to be critical in effectively navigating the process. Being an entrepreneur is far from easy, but accessing the right sources of financial capital can smooth the path at each step of the way.