Many entrepreneurs probably get this reaction often when they pitch their ideas to angel investors. Immediately the entrepreneur is stuck and the conversation usually can turn awkward quickly. How can you avoid this? Put yourself in the investors shoes.
1. Angel investors are usually self made millionaires, not billionaires. Why is this important? The cash they have available for private equity investment individually is usually not going to exceed one million, and even that is on the high end of the spectrum. Even this money is all not going to one company as angels will diversify their portfolio just as a stock investor would. Of course when you do a deal most will invest along with other angel investors, but the sum of money they will invest is usually a lot lower than most entrepreneurs know.
2. You aren’t going to take over the world in one week. Entrepreneurs often want to hit the stars before they have even reached the moon. Especially in an early stage deal, investors want to see that you can hit small milestones before they bet the house on you. Additionally, if you have proven that you can succeed with a smaller amount from angel investors, larger venture capital rounds are much more likely to happen. Pace yourself, set smaller goals to get to where you ultimately want to go and find money that will get you through each stage of your company.
3. Your valuation is a roadblock. Often before asking for money, entrepreneurs have already told the investors what their “valuation” is. In reality, your valuation is just what a group of people say your company is worth, and often is not directly connected to revenue or other fixed sources. For this reason it is best to not give a strict valuation when first meeting an investor. Sometimes this one issue can stop a potential deal in its tracks.
The question of how much is too much and how much is too little can become very confusing for the entrepreneur. When I was looking for smaller than $1.0 million I was told no one would look at such a small deal. Now that we are looking for $1.0 million I am told that’s a large sum. When a company is early stage with product on the shelf I think we sit at a difficult position. The Angel Investor wants to see sales but getting to the point of product on the shelf can take all the owners have leaving little available to reach the market so sales are sparse. The funds needed to market product are in many ways the most difficult to raise. The phrase you have to have money to find money comes from those poor bootstrapped early stage owners who took the road “prove the product exists and works” rather than pitch the “idea” before you spend of yourself. To say that this process is challenging is an understatement! But those of us who believe in what we are doing will find a way, from co-branding to distributorships to pounding the pavement. These are the companies Angel investors should look at!
Comment by Diane Dutton — September 22, 2007 @ 2:45 pm