Angel Investors – Understanding Your Target

Authors: Ian Westberg

Most entrepreneurs will need to raise a small round of capital very early in their company’s life cycle to get the company off the ground. The amount is typically anywhere from $100K to $500K and is utilized to build the MVP (minimum viable product) and secure initial beta customers to prove the viability of the product. For first-time entrepreneurs, raising the “pre-seed” round of capital can be a daunting task. To make the process a bit easier, it helps to understand the different types of angel investors and where you should focus your efforts to have the best possible chance for success.

It is important to remember that angels, unlike venture capital firms, are investing their own hard-earned dollars. These are individuals who have had success in their business ventures and are now looking to support the next generation of entrepreneurs as they begin their journey. Given that they don’t have limited partners to answer to, angels have the freedom to support entrepreneurs and solutions they feel passionate about. This is important to remember as you develop your target list.

In my experience, there are three main types of potential angel investors:

  • Those who know you. These are friends and family, people you have done business with and successful executives you have worked with in the past. They know and trust your team on a personal level and want to be a part of your success. FFF investors (Friends, Family and Fools, as they are often called) are placing a bet on you. The FFF crowd typically does not have experience in your product/solution, so some education is needed to get them up to speed on the technology.
  • Those who know your industry. These are investors with experience in or around the industry you are targeting. They can quickly evaluate your solution and the market opportunity and determine whether they are interested. While members of this group are more market-savvy, they will need to get comfortable with the team, develop trust in you and gain confidence in your ability to execute the business plan.
  • Everybody else. Investors in this group do not have a prior relationship with your team or experience with your product/solution. This group could include some of the larger angel groups in your area or individuals whom you connect with through networking. Such investors are a bit more difficult to secure because you are required to both develop a relationship with them and educate them on your product/solution.

Raising the initial round of capital for your startup is a huge challenge. Understanding your angel targets and their motivations for investing is the first step to developing a solid strategy. It is a process, and there is a learning curve. Ask for feedback and learn from every pitch. Until the check is in the bank, you’re not done refining your pitch.

How to Prepare for an Equity Financing

We have covered in past FTTWs how to value your startup and how much capital to raise. Once your startup decides to pursue equity financing, you should start to prepare for the investor due diligence process. On the business side, you will need to prepare a business plan and should take steps such as obtaining management references, interviews and background reviews, customer/user references, technical/product reviews, financial statements and business model reviews.

What Every Startup Needs to Know

On Wednesday, June 26th, Perkins Coie’s Palo Alto office hosted the startupPerColator event, “What Every Startup Needs to Know.” Lowell Ness, a Perkins Coie partner in the Emerging Companies & Venture Capital (ECVC) practice, moderated a panel which included Herb Stephens of NueHealth, Thomas Huot of VantagePoint Capital, Jennifer Jones of Jennifer Jones and Partners, Yuri Rabinovich of Start-up Monthly, and Olga Rodstein of Shutterfly.