Angels to Entrepreneurs: How to Attract Angel Funding

So, you're an entrepreneur in the early stages of launching your business. You have more than a concept or idea, have started building a product or offering a service, and maybe you even have a paying customer or two. Great work, thus far. But are you ready to seek investment from the angel investor community?

CED is currently running its Funding Series, "Raising the Dough." We've gathered the Triangle's top CEOs and investors to discuss the potential funding options for early-stage and growth-stage technology businesses.

Here's a primer on angel investment, and if you've built your business to the point where it makes sense to pursue angel investment as a fundraising strategy.

Angel Investors: Who Are They?

Angel investors are accredited investors who provide capital to a business, generally in exchange for ownership equity or convertible debt.

"Angel investors will always invest their own money," said Elaine Bolle, director and president of RTP Capital, during the first panel of the CED Funding Series, Raising the Dough. "Furthermore, angel investors typically will invest in businesses that they understand."

Deep domain expertise is one of the many benefits that an entrepreneur receives in addition to the investment of capital into their business, said Jan Davis, executive committee member for Triangle Angel Partners during the same panel discussion. "Angels tend to invest in companies where the investors can help provide knowledge, or connections."

Angel Investors: What Do They Look For?

Investors like "looking at deals where the company can demonstrate meaningful traction" in their chosen market, said Jan Davis. 

For a company that sells a product or service to another company (B2B), investors will look for a diverse group of early customers that are paying for the product or service, said Davis in an introductory conversation with the audience of more than 75 Triangle-area entrepreneurs. 

For a company that sells direct to consumers, or relies on user-growth to quantify success (B2C), investors will look for "the flywheel shape of growth" or a "reasonable revenue-generating strategy," said Davis. 

In addition to looking for companies that have demonstrated traction within a target market segment, angel investors are most interested in entrepreneurs "with skin in the game," said Elaine Bolle. "The investor must believe that the entrepreneur is fully committed to the growth of the company," Bolle said. Clarifying this statement, Bolle later said "it is virtually impossible to get an angel to invest without an entrepreneur jumping off the cliff." 

Lesson: if you're seeking angel investment, you'd better be prepared to demonstrate your commitment to your company and the early traction that gives you the belief of your success.

Your Network Is Important

All panelists agreed on one major point: angel investors will almost certainly only invest in entrepreneurs and companies that they know. 

Because "there are no such things as overnight successes," said Bolle, establishing and maintaining key relationships with investors is a vital step in the fundraising process. 

Jason Massey, founder and CEO of Sustainable Industrial Solutions, agreed with this point, noting that his first angel investor was someone he had met 8 years prior to asking for funding. 

Regular updates to a network of potential investors is important for any startup company, said Davis, because it "allows founders to show growth [traction] over time." In addition, establishing relationships early - before you need funding - will allow an entrepreneur to "demonstrate a repeatable sales model." 

Cautioning that some deals take between 6-8 months, Davis stressed the importance of regular "check-ins" with angel groups and individual angel investors. "Your goal during the process is to prove traction in your business," said Davis.

Set Expectations

It's important for you, the company founder, to set expectations with potential investors. The biggest question you'll need to answer, and the biggest expectation that you will set in negotiating a deal, is how you plan to utilize the funding in the event of a term sheet being finalized. 

Don't walk into a meeting with an investor and ask for money so that "you can pay salaries to the founders," joked Massey. Stating that absolutely no investor would provide funding to pay salaries, Massey continued to make an important point: "the use of your money will show what you value most in your business." 

What should companies focus on, and how should the money be used, asked panel moderator Jay Bigelow, director of entrepreneurship at CED. 

"The place where your funds give the most leverage," said Peter Bourne, CEO of Spring Metrics, "is scaling your sales team." Bourne cautioned against using funding to build or refine a product, stressing the importance of generating early sales in your target market. A company should focus on sales, said Bourne, because "you need to make sure that you are going to get somewhere."

Bolle agreed, stating that it is unlikely that a company will grow to $10 million in revenue with only three employees, and that "in your use of funds to grow the business, you will demonstrate your expertise and maturity [as an entrepreneur]."

The most important expectation that a CEO needs to set with investors is that "the dogs will eat the dog food," said Davis, meaning that it is vital for a startup to show investors that the target market will actually purchase their product or service.

The CED Funding Series, "Raising the Dough," will continue next Tuesday, Febrary 5, 2013. Missed the first session? You can still register for the second session and take part in a funding assessment, get one-on-one coaching from investors and CEOs, and participate in a mock negotiation between a company and an investor, mediated by a lawyer.