Sunday, January 11, 2009

Angel Investment: Dateline 2005

By Alan W. Urech

Ah, 2005! A fresh new investing year and an economically encouraging environment for it. I like it. I spot many new companies forming and fresh opportunities springing forward. With so many new companies being developed how does an Angel Investor decide and invest in 2005? How do they decide which ones are “Cherrys” and which ones are the “Pits?”

Easy for me to decide. Show me the clear path to the money! Make me drool about your business opportunity! Remember, though, that I am originally from a neighboring state to Missouri. Show me a strong, clear, crisp and concise path toward the money. Make it so that I can’t afford to pass up the opportunity to invest in your fine enterprise. Walk me down that path, but be truthful and honest about your “strengths” and “challenges” when you do. I want to build trust and an investment relationship with you.

The U.S. Small Business Associates states there are about 250,000 Angel Investors providing funding for about 30,000 small companies each year. This funding represents about $20 Billion in capital, averaging about $660,000 per company and $80,000 per Angel Investor.

What do I like? Many things, including meeting and working with new entrepreneurs and, importantly, the opportunity to grow a company and make money. I like organizations that have completed comprehensive Company Investment Due Diligence upfront and can articulate that they know what is important to me. I also like to know how I can support their success.

As an investor, there are certain critical investment criteria that compete for the investment capital I have allocated for higher risk organizations. I look upfront for these criteria and have developed an internal rating system for each of them. The top five “must” criteria that I look for in all investments includes trust in a strong, been-there, done-it-before management team with proven leadership and execution skills, a solid and focused business strategy, a great market opportunity in a market where the company can be first or second in its niche, current revenues with a clear path to significant future profits (revenue sources) and a well diversified customer base. The customer base provides me with the proof of concept.

Note that I did not mention what the product is or does at this point. I am just getting interested in how the company makes profit. Please note that I review at least 20 business propositions a week and most times more. You as an entrepreneur compete with these companies for Angel investment. With my wife and family wanting my time (and not to exclude my dog Elvis demanding her private one-on-one time), I need a real clear picture of the business, how much capital you will need in total, when I am going to get the money back and how much I am going to get back.

Once I am past these first 5 critical criteria and like it (my mouth is watering, but no drool yet), I am ready and eager to look at other important areas including the sales and marketing strategy, strategic partnerships and alliances, competition, the industry which the product resides in, the business environment, the technology (migratable, sustainable), use of proceeds, valuations, the ability to attract additional investment capital and the investor’s exit strategy. Be very honest and sincere on where the company is at this stage in its life. Angels can handle it and also it builds your trust. Now that is relatively simple isn’t it?

What are some of the “Challenges” that investors have when they are reviewing information about a company? Primarily it is shifting though the mud to get to a diamond that is so dirty that it can not shine brilliantly. Many times entrepreneurs cover the diamond with written and verbiage mud and this mud needs to be cleaned off by the investor so the brilliance of the diamond shows. It is very helpful if the company cleans off this mud first.

Every entrepreneur is excited and passionate about their company, but when it comes to giving a pitch to investors, they often don’t present the right information. Your “Investor Presentation” should be very clear and accentuated with bullet points. When you present, don’t take more than 12-15 minutes weaving your company’s story. If you have an hour with the investor, that leaves 45 minutes for their questions. Your objective is to answer the questions that the investor wants to discuss, not ones that you think are important. Most likely they have already read a synopsis about your company and have some follow-up in-depth questions in their minds. Lead off first with what the company does. Try to keep it 10 words or less. As a guideline when I am advising a company, I have them write out what the company does and then half it to a short clear and concise statement. Then state the business strategy or how you do it. This is how the company does their business. Then the market opportunity, then the management team, etc. Move quickly through other areas. One slide, one topic.

In summary, Angel investors are much more sophisticated and savvy in 2005 than ever before. They are ready to invest, but only in strong business propositions that meet individual investing criteria. They have more information, knowledge and wisdom from internet search engine sites that allow them to review your business proposition and determine if it is real and will fit within their personal investing criteria. They want to help entrepreneurs grow their companies and are eager to use their “network” to help you increase profits and market share.

This is Angel Investing: Dateline 2005

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