Angel investors want to fund companies, but startups need to prove that they deserve the money, and to do that, they need to have their stuff together.
That’s according to Kevin Learned, partner with Loon Creek Capital in Boise, who recently taught a course called Raising Money From Angels on angel investing, at Trailhead, the downtown coworking space. Learned is also one of the original founders of the Boise Angel Alliance and serves on the board of the Angel Capital Association, a national organization of about 250 angel groups.
Angel investors provide early-stage funding to startups, typically in the range of $150,000 to $1 million. For example, the Boise Angel Alliance (BAA) is now on its fourth fund, said Roberta Garvin, due diligence lead, who participated on in a panel discussion at the course.
Along with Learned and Garvin, panelists included Paul Judge, managing director of Idaho Capital Ventures, and Raino Zoller of Trolley House Ventures.
A number of heavy hitters in Idaho’s entrepreneurial community were in the audience and imparted their own wisdom, including serial entrepreneur Faisal Shah, most recently founder of AppDetex. For example, it’s important for startups to do their homework and not waste their time pitching angel organizations that aren’t going to invest in them anyway, he said.
Another audience member, Tiam Rastegar, executive director of Trailhead, asked how angels value companies. That’s one of the tougher questions, Zoller said, adding that it depends on factors such as the executive team’s experience and track record, how much of their own funding they’ve invested and how much of the product is completed. Judge added that he looks for entrepreneurs without an overly grandiose idea of their company’s value.
Angel organizations also do their homework, Garvin said, noting that she typically creates 15 to 20 pages of due diligence on a potential investee, focusing primarily on the areas where it is distinctive. From this, she typically generates a 10-page report for the group, though she admitted they don’t usually read all of it.
It’s also important to remember that angels aren’t investing out of the goodness of their hearts, Learned said. As many as half of all startups fail, meaning that angels are looking for companies that can produce 10 to 20 times return on their investment, and revenue on the order of $20 million, within five years.
Moreover, angels expect an exit strategy, or a way that they can get their money back, within a few years, whether it’s the company going public, getting acquired or raising other funding from venture capitalists, Learned said. The median exit price for Idaho companies that BAA has invested in is around $20 million, he said.
Similarly, companies that receive investment from angels should expect to see the angel take an active, if unofficial, role in the company going forward, Learned warned.
“If you take my money, you’re going to get me if you want it or not,” he said.
Entrepreneurs presenting to angels should focus on the size of the market and the problem they’re solving, rather than on the features of their project, and also need to have a focused strategy.
“’I’m going to sell direct, and I’m also going to sell to Walmart’ doesn’t work,” Learned said.
Startups should also expect additional rounds of angel funding. Trolley House, for example, usually anticipates follow-on rounds, and they are typically a much easier decision, Zoller said. Some companies have gotten funding from three separate BAA funds, Garvin added.
Ultimately, entrepreneurs pitching to angels have to be optimistic, Garvin said. “You have to think that it’s going to work, and that we’d be crazy not to invest in you.”