Overcoming Common Deal Breakers When Presenting To Angel Investors

Have you ever fallen flat when pitching your startup or business idea to angel investors? Today, we are covering how you can make the perfect investor pitch and what you will need to do in order to overcome their most common objections. Raising capital is one of the hardest things any entrepreneur has to do in order to get their business idea off the ground. While there is no cookie-cutter approach to making an investor presentation 100% successful, rather, we want to share the essence of what the deal breakers are for a majority of angel investors, with a few tweaks here and there.

Understand The Different Types Of Capital

One of the first things many entrepreneurs don’t fully understand is the difference in the type of money. There is a huge difference between what angels are looking to invest in and what venture capitalists (VC’s) are looking to investin. On the whole, angel investors will not get involved in a companylooking to raise more than a million dollars. Conversely, themajority of VC’s will not get out of bed for companies looking toraise less than a million dollars. If you can’t understand thedifference, consider the attachments that come with the money. VC’sare investing other peoples money. They will have to go through avery rigorous process before they invest any money in a business. Onthe other hand angels are open to slightly earlier deals as it istheir own money being invested. Nowadays you don’t need to raise morethan a million dollars as a startup – it might be different in somesectors but overall for technology based businesses, you don’t needto raise that much money. If you are a very early stage business, youare going to go down the angel route to start off with. Make sure youknow who you are asking to invest with, and when you are talking toangels, be aware that they will do very simple deals.

Get To The Point Fast

The best way to structure your investor presentation is to prepare for it like an interview. Even though itsillegal for a recruiter to make up their mind, most interviews aredecided within the first minute of them actually happening. Theirmind is made up in other words. It’s the same for a presentation. Theaverage angel investor will see between 350 and 400 presentations ayear, while some might see over a thousand! You have no more than 2minutes where the angel investor will want to hear what is theproblem that your business or your idea is going to be solving, andhow you are going to be providing solutions to it. The rest canfollow later. As a startup business you don’t need 50 pages tooutline your business plan. Your business plan should be 20 or 25pages maximum. At the beginning of the life cycle of your company,your business plan will likely undergo changes. Probably everyquarter if not every month. Don’t get too caught up with technicaldetails, product roadmaps or anything like that. Aside from whatproblem your business will be addressing, the other most importantinformation is actually your executive summary. If angels areinterested after that, some of them will help you rewrite yourbusiness plan prior to them making any sort of investment.

Bring A Lead Investor Aboard First

The first person you want to find as an investor is your lead investor. It doesn’t have to be the biggest investor of the round that you areraising, but it has to be somebody that can pull everybody together. Because it can take you years to raise money, and if you are trying to raise money from ten different angel investors, and they will all be asking questions, that means you won’t have any time to launch your product or run your business. Getting it over the finish line is going to be extremely difficult if they are all asking questions orgiving you different feedback all at the same time. Before going in and gathering 10 or 20 angel investors interested in investing in you, find a lead investor who can actually help you get the financing done. This will mean that all the questions will come through one person as opposed to 10 or 20, so you won’t end up spending all of your time running around answering the same questions over and over again.

Be Flexible Over Valuation

If you talk to an angel investor and ask them what is the key reason why deals don’t happen after they express an interest, pretty much every single time they will say they couldn’t agree on the valuation. While it’s important that you have all the confidence in the world, or you are 100% convinced that your idea or startup is going to make money, or your company is going to be the next google, you must understand that most angel investors are overly cynical about unrealistic evaluations. With respect to valuation, do not say that you are a pre-revenue business worth 2.5million dollars, raising half a million dollars. More likely than not, most angels will promptly respond “thank you but no thanks”.You can do finger in the air stuff, but there is no way to evaluate a pre-revenue based business on the whole. Talk to a number of different angel investors in order to get a feeling for what is a realistic valuation for your business. If most of them are all telling you roughly the same amount, that’s probably what the value of the business actually is. If it is not the value that you want it to be or need it to be, look at other valuation milestones. Many early-stage startups do not understand what actually will add value to the business. Be it somebody with industry knowledge, a contract, or revenue. Try and understand what adds value to your idea or startup, and where that is going to come from.

Have Due Diligence Documents Ready

Once you have investors who are interested, like your valuation, they will ask you for a due diligence pact. Every angel investor, on the whole, will have the same question; how professional are you? While most angels will understand this might be your first time running a business, but there are certain basic things they would expect you to understand about management. If you haven’t gone through this process before, be professional and have your paperwork printed out and ready to go the moment someone tells you they are interested. Send them your employment agreements, where you are on the IP side, do you have any trademarks or patents or any binding contracts you have signed. Handing that over as a management team will add a lot of value to you. Don’t forget, angel investors would have been involved with many startup businesses like yours and know what it’s like running an early stage business. They won’t expect you to know everything, butif you can show them that you have basic management principles will only work in your favour.

Make Sure You Are Raising Enough Money

We talked about this earlier but fundraising is very time-consuming. If you’re approaching angel investors and telling them you are raising half a million dollars now to get you through to another round of financing in six months time, that is a very bad investment for most angel investors. Because fundraising will pretty much take up all of your time for a minimum of six months. The angel investor is investing in you as the management. They will expect you to focus on growing the business for a minimum of 12 months before looking for any further funding. If you are a pre-revenue business, you should ideally raise between 18 and 24 months of capital. Most angel investors will be aware that you won’t have a lot of revenue during that time but if your business is going to be successful, you need to focus on building a client or customer base and growth during the first 2 years of operation. Not fundraising.

Angels Will Not Be Kind To The “Lifestyle Entrepreneur”

The worst investment that angel investors actually make is not actually in a failed business. Angel investors accept that what they are doing is high risk. The worst investment they can make is in a “lifestyle business”; where the only person who is really having a good time is actually the entrepreneur on a nice high salary. If you are going to an angel investor and you’re saying that you’re raising half a million dollars, but ask for a salary of $100,000 a year – because that is what you make as an employee – that is not something most angel investors would be willing to accept. Most entrepreneurs for an early stage business give or take will be on annual salaries of around $40,000 or so. Most angels will not be willing to accept the fact that you need to have a large salary. For technology companies, in particular, salaries will be the largest expense of your business. If salaries are too high, angel’s know that you will have a hard time getting into positive cash-flow. Excessive compensation is actually the leading reason a lot of companies fail.

Disclose Possible (Or Real) Issues Upfront

Angel investors understand that they are investing in high-risk businesses. They are also aware that for quite a lot of entrepreneurs to get to where they are to even come and talk to them, they probably had to cut a few corners. What angel investors wouldn’t like to have happened though is unexpected surprises. If you have any debt, or have taken out a massive loan from a bank, but it isn’t in the business finances because you were hoping to have paid it back quickly, angels will recognize that sometimes you have to beg and borrow to get the money to bootstrap a company, in order to get it where it is today. Tell your angel investors everything upfront, even if its something to do with a troublesome employee who wants to take you to an employment tribunal. It’s not necessarily a deal breaker. The only thing you can guarantee is that if you are keeping something that can harm the business from them, they are going to find out – whether that is during the due diligence or worse, on an internet discussion forum! The only thing they are going to do when they find out is walk away. Because angel investors are investing in you and are trusting youthat you were doing everything honest with them. If they doubt that for one minute, they will walk away from the deal.

Set The Fee Structure Right

This is a very strict rule most seasoned angel investors live by, but if more than 10% of the investment is going out on fees on day one, they won’t complete the deal. These fees can include but are not limited to legal fees, advisor fees or even network fees. When you’re talking to the lawyers and you’re signing them up, ask for a fixed fee. Or if you are lucky enough to have a strong lead investor, or if you’re dealing with someone who actually understands early-stage businesses and has been involved in a number of deals before – in terms of the legal side of it – ask them for advice. It’s very important that you know exactly what the legal costs are going to be. If you go through an angel network to raise money, speak to a number of them. Find out what all the fees are in advance – if you are a good company with a great idea, they will negotiate their fees. Because angel networks want to have good companies to present to their investors themselves.

Avoid Using The Word “Conservative”

If any of you end up presenting to an angel investor, please in your presentation, don’t use the word conservative – because you’re not being conservative. Angel investors don’t believe you are being conservative. The whole point of an entrepreneur is that you think and dream big and part of your angel investors job is to try and bring you back to reality. You can spend as much time on your finances and your sales forecasts, or hockey stick user acquisition charts as you want, but no investor is ever going to believe them. The only thing that they will look at in terms of your financials, is actually your cash flow forecast because that is actually something you can control.

Picking a presentation style is its own challenge, but when it comes to presenting to angel investors, being aware of these deal-breakers and incorporating this advice into your presentations will hopefully guide you to better success when pitching to angel investors. Conversely, if you are an angel investor, hopefully this article has given you some things to consider before investing in any new businesses. If you enjoyed reading this advice, then please share it with others in your network. Otherwise, if you have anything to add,please drop a comment below.