After years of cloudy skies in Startupland, the sun is peeking out, and investors are tipping their toes back into the wading pool. Last year, venture capitalists and angels who co-invested with them placed $7 billion into seed and early-stage deals, an 11 percent increase from 2009, according to the most recent PricewaterhouseCoopers/National Venture Capital Association MoneyTree report. From the conversations I'm having in the investor community, this year is promising to be even better.
Is this a limited window of opportunity, or more? It's hard to know just yet. But as the stock market edges ever higher and the wealthier feel healthier, there's a good chance that American startups will also get their moment in the sun.
To help you get a jump-start with fundraising, I've gathered tips from active early-stage investors and entrepreneurs who managed to beat the odds by raising capital during and after the Great Recession. Herewith, in no particular order:
- Meet angels via the entrepreneurs they've funded.Referrals carry weight, but for those without a long list of angel contacts, getting access to angels via entrepreneurs they've already funded can be equally powerful. "While most angel groups don't post a list of members, they do publicize the companies they've funded on their websites," says Richard Sudek, a member of Tech Coast Angels, a group in southern California whose members invested about $6.2 million in 2010. "It's a targeted way to get access to investors and acquire intelligence on the personality of the angel group, all in one pop," Sudek says.
- Avoid approaching investors in July, August, and December. "The high-net-worth individuals [who] make up the angel universe tend to take extended vacations in the summer and the period between Thanksgiving and New Year's," says Jennifer Naylor, an angel investor with Golden Seeds in New York. Pitching at a screening in slow months can result in delayed response from investors or even lack of interest at lightly attended screenings. The group invested $8.7 million in 2010.
- Let investors help you refine your pitch. "Don't enter the process blind," says Jamie Rhodes, an investor in Austin with Central Texas Angel Network, which invested $5.5 million in 2010. "Our executive director works with entrepreneurs [who] have been selected to pitch, coaching them to improve their presentations and helping them anticipate questions." Other groups, such as Tech Coast Angels, allow entrepreneurs to sit in on screenings to get a better understanding of the process.
- Skip the jargon. "Most early angels will not have domain expertise in your industry or technology. Keep your presentation jargon-free," says Anita Brearton, who chairs Golden Seeds' Boston branch.
- Be coachable. "Angels aren't focused only on ROI," says Tech Coast Angels' Sudek. "Most have a strong desire to mentor and help build companies." He advises entrepreneurs to appear coachable by avoiding the following rookie mistakes: 1. When asked questions during a screening, do not respond defensively. Be open to other possibilities. 2. Don't start answering a question before it's finished being asked. 3. Don't be afraid to say you don't know the answer to a question but will look into it. Be sure to get back promptly to investors with the feedback.
- Entice friends and family with merchandise discounts. To persuade friends and family to support your business, consider offering an investor discount. Mousumi Shaw, founder of Austin (Tex.) jewelry retailer Sikara), raised $100,000 this way in 2010. "Not only did we bring in more investors, but they became loyal customers and proud evangelists for our products," says Shaw.
- Tell a story. "People relate to stories, and it's amazing how many entrepreneurs who are trying to raise cash just dive into the details of their business without first creating the emotional connection that comes from [a] story. Learn from the presentations of Steve Jobs," says Elie Seidman, a serial entrepreneur and CEO of Oyster.com, a hotel research and booking site that has raised $11 million.
- Recognize that investors come from unlikely places. "I first met the lead investor of our angel round at a job interview years [ago] when he was recruiting a [vice-president for] sales [and chief operating officer] for his company. While I didn't take the job, I did express to him my intent to start my own company. When I did a couple of years later, we had built a substantial relationship, such that he wanted to lead the angel round," says Bryan Burkhart, chief executive of H.BLOOM, a luxury flower subscription business in New York City with $3.2 million in angel and venture capital. "when you go to school, interview, work with consultants or fellow employees," he adds, "the relationships you build and impressions you leave are not just about that moment in time, but rather may be beneficial in the future."
- Concentrate on landing a lead. "Your lead investor can help set the terms and draw in other sources of capital," says Andy Monfried, CEO of Lotame, a Web marketing technology company in New York City. "Focus your energy on landing a lead before spending time on angels who are more likely only to follow," adds Monfried. Lotame has raised $33 million.
- Target investors that have invested in your field. "History is the best predictor of the future," says Satya Patel, a partner at venture capital firm Battery Ventures in Silicon Valley. "Get intros to angels who have invested in your market or in similar companies before to maximize your likelihood of success."
Monica Mehta is managing principal of New York-based investment firm Seventh Capital.
COMMENTARY: All great advice. I would also include joining a startup incubator like Y Combinator, IO Ventures, and others. You get the best of both worlds, a little seed capital, access to the best minds in venture capital and a lot of experienced advice to get you ready for launch.
I would also recommend that the founders have some "skin-in-the-game" or having invested some of their own capital into venture. This demonstrates that you are willing to take on the business risk and committed to the venture.
Courtesy of an article dated February 18, 2011 appearing in Bloomberg Businessweek