FIND THE RIGHT ONE, COURT THE RIGHT ONE, AND GET THEM TO INVEST
I often speak with entrepreneurs about the difficulty in raising capital from individual angel investors—a feat that often proves more difficult than raising capital from angel groups. Entrepreneurs are accustomed to going through the motions of securing a coveted invitation to present to an angel group (and often presenting again), receiving a term sheet from the group, proceeding with negotiations, and then closing the deal.
When it comes to individual angel investors, it’s a completely different dance. The secret doesn’t lie in how you ask, it lies in how you build up to it—how you build the relationship, garner trust, and convert them to serve as your evangelists.
View Angels as Customers
Entrepreneurs typically view angels as “suppliers selling capital,” when they are in fact “customers buying equity.” This shift in mindset will not only motivate you to better prepare for your interactions with angels, but transform your approach and, hopefully, increase your success.
Do Your Homework
Before you begin courting a potential angel investor, you should be able to speak as confidently as to why they should invest in your business and as to why your target audience should purchase your product or service. “The Entrepreneur’s Guide To Raising Capital From Angel Investors” by Tarby Bryant is a fast read and a great place to start, as well as blogs and articles on www.kauffman.org that discuss raising capital from angels.
Invest in Building Relationships
It’s a tough fact seasoned entrepreneurs know firsthand: You have to bootstrap for a year while you establish relationships with credible angels and angel groups. In short, you need capital to stay afloat while you raise more capital. And that takes serious planning and perseverance. It also requires much more than finding a wealthy person, and it’s risky to raise capital from complete strangers. Instead, build face-to-face rapport over multiple face-to-face meetings. It’s like a courtship built slowly over time, with each encounter leaving the angel investor wanting to know more. Another way to build trust in the relationship is to ask for advice after you’ve shared insights into your business. Once the trust is established for both parties, make the move (but not before you have an attorney-approved term sheet prepared).
Expand Your Horizons
Do not limit your prospects to Central Florida. If you’ve been referred to an angel through a common contact, make sure you’re arming your referral source with tools to pass along; a professionally designed website, a non-confidential summary of your business model, and a brief summary of your and other team members’ backgrounds. Once those relationships are developed, new angel investors can champion with other angel investors in their circles.
Closing the Deal
A challenge with raising capital from individual angels is to get each angel to commit before you have commitments from others for the entire minimum offering. While you could formalize the commitment by requesting a signed agreement and deposit in an escrow account until the minimum is raised, this is usually not well received by angels. You’ll have much more luck if you go with trust. Once you have similar non- binding commitments from others, then sign the agreements and close. It also helps if the investors know one another, as a commitment from one will lead the rest and result in a closing.
After you close your first deal with a new angel investor, even greater opportunities for both parties come as your relationship grows. Like other investors, angel investors see opportunities each year to re-invest. Building a solid foundation from the beginning will benefit both in the long run.
William A. Grimm, J.D., M.B.A., is an Executive in Residence for Entrepreneurship and Negotiation at the Rollins College Crummer Graduate School of Business.