Don’t have time to read? Here’s a quick but comprehensive summary of Brian Cohen and John Kador’s “What Every Angel Investor Wants You to Know: An Insider Reveals How to Get Smart Funding for Your Billion-Dollar Idea,” released in April 2013.
Who should read this: Entrepreneurs thinking about raising angel funding, or in the process.
Elevator pitch: This book gives you the perspective from the other side of the negotiating table: what angels look for in a startup, including the perfect elevator pitch, what you have to demonstrate about yourself and your idea, and how to prepare for due diligence.
Authors: Brian Cohen is the chairman of New York Angels, the first investor in Pinterest, and the cofounder of Launch.it (with his son, Trace). John Kador is the author of over 20 business books, including Effective Apology: Mending Fences, Building Bridges, and Restoring Trust.
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Startups are good for society, and they need angel investors. Luckily, innovation is faster and cheaper than it has ever been, the market for digital technologies is getting bigger, and angel investors are proliferating.
Less than 3 percent of Americans actually meet the SEC’s income criteria to be accredited investors. There are about 250,000 angels in the United States funding 50,000 startups per year. Angels sometimes work in groups, allowing them to make more and bigger investments. But most angels don’t make money.
Before looking for funding, you should know what you’re getting into. Raising angel money means you are beholden to outsiders, and you must try to exit. In fact, you should have an exit strategy for an acquisition – most importantly, a target date and price – before you go to raise angel funding.
Choosing an Angel
Do research on potential angel investors, including why they invest and what value they provide. Instead of “smart” vs. “dumb” money, Cohen prefers the distinction of “investor raising” vs. “money raising.” All money is money, but the best angels are the ones who will offer hands-on advice and introductions – which can be even more important. They can answer questions based on their experience, tell you the truth when no one else will, and help with recruiting, as well.
Avoid “shark” angels (who want something from you, like a job), angel brokers (who introduce you to angels), and controlling angels.
Use tools like LinkedIn, Gust, AngelList, and Quora to get connected with angels.
Wooing an Angel
Most angels invest for the joy and fulfillment of meeting ambitious founders and helping build inspiring ideas; take advantage of that. The process of establishing a relationship should be slow, personal, and fun. Start by meeting them at a presentation or conference, and just have an interesting conversation inspired by something you have in common. Expect a “getting to know you” period, from talking about yourself to eventually talking about the business and its issues.
Throughout, entrepreneurs must demonstrate a variety of characteristics: integrity, determination, and street smarts; experience in entrepreneurial pursuits and leadership; and domain knowledge and skills. The most effective entrepreneurs focus on customers (not themselves) and want to serve, make decisions and are in control, act smart and fast, and don’t waste time. They also keep promises, communicate well, challenge assumptions, and look at the big picture. They can show a strong customer acquisition model, understanding of the competition, willingness to pivot, and the ability to tell stories, as well as determination, passion and vision, and – crucial when finding an angel, which means a coach – coachability.
Part of the reason an angel will invest in you is for your beliefs: about the product and how the world works. Startups should also believe in their team, in quick rather than slow launches, in understanding customers, in metrics and analytics, and in frugality. Know what your beliefs are and where they come from. But beliefs and big ideas alone are not enough – you need execution, as well.
Angels also want to see “teammanship”: a state where the team works well together, has shared beliefs, and follows leadership. They will look for founders who tell a consistent story, are “called” to entrepreneurship, focus on executing to build value, have complementary skills, understand the financials, and can push through setbacks and resolve conflicts.
To receive angel funding, you’ll need to show that your idea has the capacity for growth, scalability, profitability, and sustainability. Investors want to see that you’ve identified a reachable and substantial market, and actually talked to customers and learned how they use your product.
Iteration can help move your startup from unfundable to fundable. Develop a hypothesis, watch for feedback, test the hypothesis with a cheap MVP, reflect, and make changes.
Pitching an Angel
The perfect elevator pitch is 30 seconds or less, including specifics on your problem, solution, and the market for that solution.
For a 15-minute pitch, follow David S. Rose’s recommendations on elements to include: the business overview, management team, market size and pain, what your product is and does, the business model, target customers, how to reach those customers, the competition, your differentiation, a financial overview, and funding history. Cohen likes when founders make him smarter by educating him about the market and its future. But he’s turned off when founders don’t know their exact numbers around costs, make errors in their presentation, or talk about “sales.”
Negotiations
Angels fall into two camps, some doing due diligence and others relying solely on their impression of the team and the idea. (But research shows angels who do more due diligence receive higher returns than those who do less.) Don’t be afraid of due diligence, and be prepared to answer questions about the team, product, customers, market size, IP, and business transactions.
You have big incentives to get a yes or no quickly and not waste time, whereas angels have little incentive to say no quickly. Ask questions that will bring out the investors’ hesitations – and their “no” – to minimize time wasted. You’ll learn something in the process.
Other Types of Funding
Friends and family rounds can be risky – emotions get involved, they may pester you for updates, and they may never see a return. If you do take money from friends and family, try to take it from people who have invested before and can afford to lose it. Ideally, offer a loan (rather than equity) and make a structured deal with fair repayment terms that tie repayment to your cash flow.
Venture capitalists may sometimes want to get in on angel deals, but be wary: they may demand bigger exits down the line, or scare off investors if they don’t participate in your future round.
Other options for funding include incubators and accelerators – the latter being more successful in helping startups – and various types of crowdfunding. Crowdfunding carries some risks, as it doesn’t come with advice and can create an administrative mess.
Grade: A-
This first-person account of how angels invest is not only chock-full of advice, but entertaining. I enjoyed Cohen’s description of the founder-angel dynamic as an “emotional hugging relationship,” a whimsical section called “Feast with Me” about how the negotiation process is like a succession of meals, and a funny list of what angels hear when founders say things like “blue ocean” or “revolutionary.”
In addition to advice, Cohen provides specific examples from his portfolio, and even includes the New York Angels’s due diligence checklist and term sheet.
My only critique is that the sections, even within chapters, are a little disjointed. The summary above is actually pieced together, not following the order of the book. But as Cohen explains at the beginning, this isn’t a book you must read cover-to-cover; instead, you can pick up chapters at will, in whatever order, and still get the benefit.