Financial Management

Joe Platnick: The Angel Funding Process – What Every Entrepreneur Should Know

SBEC: Ask the Angel Investors

[This article originally appeared in 2013 – Mr. Platnick has updated to reflect recent marketplace changes.]

Recently a company founder asked me about what kinds of things entrepreneurs have done (and should do) to increase the odds of getting funded. A few years ago John Isaacson, past Chairman of the Pasadena Angels, did a presentation on “How to impress an Angel and get your company funded.” This presentation provided a comprehensive overview of the common denominators (both good and bad) we’ve seen from companies pitching the Pasadena Angels over the past 14 years. For John’s talk, he divided the presentation into the following topics:

  • What Every Entrepreneur Should Know
  • What We Look For
  • Investment Criteria and Cheat Sheet
  • Getting Inside the Mind of the Angel
  • Top Deal Killers

For this post I’ll talk about what every entrepreneur should know and provide some additional granularity to John’s main points on this topic:

1. Having a good idea is not enough

Every so often we come across an entrepreneur who believes they’re investment worthy based on how bright they are or because they came up with a good idea that was well articulated in a 2-page summary. Along with the funding criteria on the Pasadena Angels website, there are two other things we look for in companies: (1) a prototype or proof-of-concept that validates the company really can deliver on its idea; (2) ‘real’ market validation to confirm that a viable market exists; (3) the “plan” behind the plan, which I’ll address in a later post and covers how you’ll execute once you’re funded.

2. Raising capital requires both time and money

Periodically we’re impressed by an entrepreneur that has left a well paying job so they could devote all of their time to their startup. To financially support their new venture, they will often take a second mortgage on their house and max out all their credit cards. The net impression when we see this is that he/she really believes in themselves and their business, are completely committed and has some serious skin in the game. At the other extreme we’ve seen people who keep their day jobs, devote a few hours per week to their fledgling business and have invested only a few hundred dollars of their own money. Although you don’t have to follow the first scenario to secure funding, you should make sure that at a minimum you’re at least half-way between the two.

The two key points on this topic are you’ll need to invest sufficient time and money into your business to get to the point where a prospective investor will be interested. Secondly, the process of raising money will invariably be the hardest part in a startup—which also translates into time and $$$$$.

3. You can save time and money if you understand the investment process

Although this is stating the obvious, you’d be amazed at how many companies don’t take the time to do this.

4. Identify and contact prospective investors whose investment criteria match your situation

Once again, it’s pretty intuitive. One added benefit of doing this is that this research may also help you discover things about the investor that you can use to get your company noticed.

5. It’s like college…you’ll be graded on a curve

Back when I was in college I was surrounded by a lot of very bright people. As if the situation wasn’t challenging enough, my class grades were often determined by how I did relative to them and the class average, and not on an absolute scale. Raising money is somewhat like that, because investors make only a limited number of investments. For the Pasadena Angels, it’s typically 12-15 per year. Although your company may be great on an absolute scale, the chances of getting funded will go down if an investor is simultaneously considering more investment worthy (i.e., stage, market, team, exit opportunity, etc.) companies. Historically, there have been many good, potentially fundable companies we’ve had to forego because of this.

6. Don’t stop till it’s done

At times we’ve watched entrepreneurs reduce the amount of time and energy they invest in the fundraising process after hitting a milestone along the way—but before actually having the money in the bank. The most common time that we’ve seen them ease up has been after receiving the term sheet and investment agreements. The amount of time and enthusiasm that you expend during the latter stages should be the same as when you’re first pitching. Remember, don’t stop until all of the money has closed and it’s in the bank.

Patrick Stacy: I’ve Got a Great Idea!

When Patrick Stacy, SBEC financial & business mentor, was asked what advice he would give entrepreneurs, he had some very helpful insights. Read to find out more!

First off…the disclaimer. I am NOT an entrepreneur. But during my career as a CFO for middle-market businesses, I have helped entrepreneurs with great ideas turn those ideas into business success. However…here’s the conundrum. Most successful entrepreneurs undoubtedly start with a “great idea”. But not all great ideas become successful businesses. And why is that? There is no one answer to that question. Whether a great idea becomes a successful business or not depends on so many different factors that MAYBE I could address them in a book…but certainly NOT in a blog!

The biggest quandary is that every great idea is going to encounter its own unique set of factors that will determine its success. Will someone buy what you are selling? Can you manufacture it? Will you run out of money? How can I find good help? These are just a few common issues that different entrepreneurs have encountered in the past. And there are a myriad of others. Some of these factors are show stoppers…if you can’t sell what your great idea produces, sorry, but you don’t have a business model…you have a hobby.

So, how can an entrepreneur determine which issues could potentially derail her or his great idea on the way to Success Station? Again, no one answer fits all situations. But one simple method of attacking the question is to ask someone who knows more than you. If you have a critical patent question, you need to find a legal expert familiar with your product and get advice. If you’re not sure about how to market your product or service, find someone who knows a lot about that field and question them.

Ultimately, as an entrepreneur, the decision to move forward on your great idea is yours alone (or yours and your partners). And you may find that factors you believed were show stoppers are really not that crucial to your success or can be overcome with relative ease. But failing to get advice from experts in a number of different disciplines related to your great idea may be the ultimate factor in whether it succeeds or fails.

Most entrepreneurs don’t lack for belief in their idea, not do they lack the will or effort to make it happen. But if you don’t know what obstacles you will encounter on your journey, it’s hard to know if you’re tackling a difficult hill or Mt. Everest. There is not any one road map, but ask people who have taken similar treks and you may just reach your destination.

And one more thing…enjoy the journey!

Patrick Stacy: SBEC Mentor

Patrick Stacy
CFO

Christopher Braun: My Advice for Entrepreneurs

SBEC recently asked a few of our mentors to share insights with everyone about growing businesses. SBEC’s Chairman of the Board, Christopher Braun, shared some valuable ideas. Enjoy!

What is your best advice to start-ups and entrepreneurs?

Several things come to mind:

  • Develop a group of advisors/ mentors as soon as possible…they can help you avoid mistakes.
  • Don’t be afraid to ask a lot of questions.
  • You are not an expert in all fields and recognize and accept that you will need professionals to help you.
  • Surround yourself with people that are smarter than you.
  • Define your market succinctly.
  • Define your value proposition succinctly.
  • Articulate what your target customer looks like.
  • Become customer-centric

What are a few things you wish you knew when you first started your business?

  • Cashflow is key. You will need to be able to operate your business for months without receiving payment for your services.
  • Plan for cash flow to be a problem on start-up and during rapid growth phases.
  • Define what success looks like for you and your company.
  • Develop a Plan for the best and worst case scenarios for your business.
  • Be willing to adapt to many changes… all the time.
  • Continually strive to be the “go to” person for your industry. Be an expert.
  • Your clients, vendors, and employees can last a lifetime.
  • Be willing to accept there may be a better way to do something even though it may mean that your idea is not

What is the best decision you made for your business or professional career?

It’s great if you can join groups of unfamiliar people, be open to listen, and feel comfortable to ask for help from them.

 

Chris Braun: SBEC Mentor

Christopher Braun
CEO
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