A vast majority of young companies never make it past the initial screening process. Here's how to beat the odds.
The papers are filled with scary statistics. Here are a few more for entrepreneurs on the hunt for capital from angel investors--those loosely banded groups of deep-pocketed individuals looking for the handsome returns that only risky, early stage investing can (sometimes) bring.
According to the latest data from AngelSoft, which pairs entrepreneurs with angel groups in a particular city or ZIP code, only about one out of 100 companies that make a formal request for angel funding manage to secure the capital. Among the axed, three-quarters never make it past the initial screening process; of those that do, more than half are eliminated during live presentations and discussions, and another 10% during the following due-diligence process.
It's a brutal gauntlet.
While there are no guaranteed strategies for success, you can boost your chances of survival. Over the past decade, I have had the opportunity to see how the process works, several times from the start-up side, and more recently from the angel perspective (as a member of the selection committee for the Arizona Angels Investment Network, in Phoenix).
Here is my list of the top 10 action items for those looking to land angel funding. If some of these are familiar, ask yourself: Are you actually doing something about them?
- Incorporate your business now.
- Lineup an experienced management team.
- Launch a website.
- Defend your intellectual property.
- Build a prototype product.
- Hit the high notes with a brief, but compelling executive summary or Powerpoint presentation.
- Prepare an investor-ready business plan.
- Crunch the numbers with a comprehensive set of financial projections.
- Prove the concept and provide proof of a sustainable business model by closing at least one customer.
- Have some skin-in-the-game by investing in in your own company.
- Tap friends and relatives as your primary source of capital.
- Network as much as possible to reach as many angels and gatekeepers.
I hope the takeaway is clear: Angels can be saviors, but not without plenty of careful preparation. Don't expect anyone to swoop down, gather you up and whisk you to financial freedom. For more on raising angel funding, read "Wooing And Choosing The Right Backer."
Martin Zwilling is the founder and chief executive officer of Startup Professionals, a company that provides products and services to start-up founders and small business owners. He can be reached at [email protected].
COMMENTARY: I have been hammering away at this topic for some time now. Don't expect the angel to take on all the risk. You should have skin-in-the-game by investing money into your own business.
Courtesy of an article dated October 27, 2009 appearing in Forbes
I have reduced the above into what I call the BIG FIVE investment criteria, namely:
- Fill a real need or solve a problem in the marketplace.
- Large potential market with high barriers to entry.
- Experienced management team in the chosen industry.
- Proof of a successful business model (sales, customers, contracts).
- Compelling value proposition (patents, trademarks, secret formula's, no competition, disruptive or breakthrough technology, access to scarce resources, way ahead of the learning curve, very low costs, high profit margins). Your venture should as many of these attributes as possible.
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