You’ve come up with an amazing idea. You’ve stacked up all your coding / photoshop skills and mocked an amazing prototype. Now it’s time to get things started with some seed money. The first destination for funding are the famous family, fools and friends. But as soon as you go beyond this initial pool of capital, you need to prepare a pitch for early stage business angels and early stage funds.
Besides starting some companies (TiberiumSun, amiando, IDnow) I went into active angel investing about five years ago. I've invested in over 60 European internet startups. Some of them failed, most of them do “okay” and some few are doing exceptionally well.
Here are my five tips for not screwing up your pitch with business angels:
- Present me the opportunity for a 100x return
Angel investing is probably one of the most risky and most volatile asset classes. Early stage companies have little securities and high risks involved in all dimensions: Market risk, team risk, financing risk, execution risk and risks probably everywhere else, too. The power law of returns (few winners have to pay for more loosers) dictates a portfolio approach for business angels: Studies have shown that returns are significantly higher the more investments an angel made. Winning chips have to pay back 20x and beyond. Most angels aim to have at least one 100x+ return deal in their portfolio as this is where the fun (i.e. absolute return / IRR = relative return) starts.
This means for you: Show me that market you are addressing is big enough in order to warrant this kind of return. Show me that you are the team which is able to capture this opportunity. Make me believe that now is the perfect timing to do this. Don’t present me an opportunity that gives me a three times return if all things go well.
- Show me that you know your business and that you can SELL it
As your startup will probably be in a very early stage of its business, you will need to rely on your sales superpowers to make things look a bit better than they are in reality. This is called selling, and selling is a crucial part of fundraising. Never ever change the rules of reality, but bending the borders can be helpful in order to seal the deal.
As an investor, I will judge your presentation, your communication skills and basically everything else you say or communicate. I expect you to be professional – as in a conversation with one of your future customers or employees. The way you communicate reveals a lot about you: Do you come across as the shy introverted founder, unable to emphatically bond with your communication partner? Or as the arrogant alpha tiger, unable to create social ties with the people around you? Or as the likeable and knowledgeable leader, who creates a positive and inspiring aura around you? This makes a big difference and is a reliable indicator for future performance…
Also, know the numbers and dynamics of your business: Who do you expect your customer to be and how much do you expect to spend on acquiring your customers?
Finally, explain to me the lock-in effects that will help you defend your hopefully ultra-profitable business so that all the value generated goes into your company and not somewhere else.
- Be realistic but bullish with your deal term expections
This one is tricky:
If you’re pricing your company (i.e. pre money valuation) too low, it will hurt your chances with educated investors. Pricing a great opportunity too low is a bad indicator for future selling performance. After all, we want you to negotiate hard with your future customers (to get sales), venture capital partners (to reach high valuations and great terms later on) and ultimate exit partners (to reach a nice selling valuation).
If you’re pricing too high, you’ll risk missing out smart investors and might end up with dumb investors or no investors at all.
At the end of the day, an investment deal should work for both the founders as well as for the investors. Having reasonable expectations and transparent communication about this usually leads to the best outcomes. Clearly communicate your expectations and be ready to defend them, but be ready to be flexible in reasonable ranges to make things work if expectations are not aligned with your preferred business angel. Always optimize on investor quality, not on extreme valuations & terms. If Mark Zuckerberg offered you to invest at half the valuation compared to your caretaker, it’s a clear call…
- Don’t waste time with the wrong angels
First of all, don’t waste time by contacting angels outside of your business sector. If you’re a startup in the fintech industry, don’t contact angels who invest primarily in ecommerce. Do your pre due-diligence on angels: Are they active (don’t waste time with inactive angels)? Do they invest relevant money (don’t waste time for angels who invest less than what you lawyer bills for the round)? And most important of all: Are they in good standing in the founders’ community? Do their other portfolio CEOs say great things about them?
- Give me the FOMO (Fear of missing out) on missing out the investment of my life
Yes, investors are human. And yes, pitching to investors is SELLING and DATING. Do the pretty-girl dance. One of my internal rules for making an investment decision after checking all the obvious (great team, market, …) is “Will someone else fund this if I don’t, and will they be able to raise follow-up funding later on?”. If both are a yes, it makes it way more attractive to invest. If I get the impression that I’m the only investors willing to put money into your endeavour, it will turn me off quickly.
Good luck! And: Get the right angels on board. They will guide you through though phases (you’ll encounter them) and will be your sparring partners for the initial phase of your hopefully big scaling company.