RSS
Capital fundraising is one of the most challenging and time-consuming tasks an entrepreneur will undertake in order to launch a new company. A fundamental consideration is – Where should I seek the initial funds? Most advisors will recommend that entrepreneurs first seek out “family and friends”. While this might be acceptable to some, I follow the old adage “never do business with family.” So, where does that leave young start-ups that require the initial funding to demonstrate the commercial viability of their technology or product?
For many, the answer is to approach “Angel” investors. As the name implies, Angel investors can be less threatening and more easily persuaded that your mouse trap is the latest and greatest. In addition, Angels typically invest earlier and are more risk-tolerant than institutional investors. The next question you might be asking is, “How do I find these Angel investors?”
Fortunately, there are an increasing number of Angel investors active iacross the country. To begin, it is advisable to immediately begin networking and marketing at venues that Angels attend to learn about new potential investment opportunities. For example, in the Triangle the Council for Entrepreneurial Development (CED), sponsors many forums where Angel investors will be in attendance to look at new companies.
Remember, networking with the right people is not enough. You have to be prepared to market your new business effectively. Marketing to Angel investors does not mean a full page advertisement in the Wall Street Journal. Rather you need a short meaningful “elevator pitch” and a basic Executive Summary outlining the opportunity. The elevator pitch provides a brief introduction to your management team, market and product. It should last less than 60 seconds. The goal of the elevator pitch is not to give every detail. The goal is to intrigue the potential investor so that they are interested in hearing more detail. At that point you should be ready to deliver your Executive Summary and extend an invitation to have an informal discussion over lunch. Hopefully this will get the ball rolling and with more information you can convince the Angel investor to participate in your funding.
Many individual Angels find comfort in numbers and have formed Angel investment groups. These groups will perform detailed and aggressive due diligence, asking very pertinent and important questions. Although they have a more formal process than individual Angel investors, these groups understand that many entrepreneurs are just starting out and may not be as advanced as expected by many institutional investors. One Angel group conducted the best due diligence of any institutional investors, having asked the Gentris management team some of the most appropriate and challenging questions.
In the end, most start-up companies would do well to consider approaching Angel groups that have a well-defined process and involve members who will be interested and understand the company’s technology and expertise. The three groups I recommend, all active entrepreneurs in North Carolina, are Charlotte Angels Partners (CAP), Charleston Angel Partners (CHAP), and Piedmont Angel Network (PAN).
So what about individual Angel investors? How do you find these individuals? Again, networking and marketing are critical to getting your company, technology, management team, and market potential known to those in the Angel investment community. I highly recommend that new entrepreneurs surround themselves with both serial entrepreneurs and knowledgeable business advisors who can guide them to those willing to consider an investment in their company.
While individual Angels do not necessarily bond into an established group, they do talk to each other, share due diligence, compare notes, and inform each other about promising investments. I was surprised to learn that among the individual Angel investors who purchased equity in Gentris, many either knew each other personally or had co-invested in previous deals. This further demonstrates the importance of networking and marketing for entrepreneurs seeking funding.
Once found, what kind of process might you expect from this group of investors? All entrepreneurs need to be aware that the needs and expectations of individual Angel investors differ from those of Angel groups or institutional investors. Typically, individuals are looking for a greater return on investment and a shorter exit strategy. After all, these Angels are taking a larger risk than others who invest later, when the risk is reduced commensurately.
The other distinction is that individual Angels may want to interact and receive information about the company’s progress more frequently than Angel groups or institutional investors. After all, these other groups can usually rely on a designated board member for information and oversight concerning their investment. A young company should understand that there is a trade-off between taking money from Angels versus institutional investors. While individual Angel investors have a less strict entrance criterion, it comes with a certain expectation that they will need to know how their investment is progressing more frequently.
When looking for funding opportunities for a fledgling business, I recommend that you know the alternatives, understand the needs of the investor, network in the right places and be ready to market your venture every chance you get.
Michael Murphy is a serial entrepreneur having founded and started three companies, including Gentris. Murphy is recognized as one of the pioneers of the clinical pharmacogenomics industry as a founder of Intek Labs, the first international pharmacogenomics company. Murphy is also very active in the Triangle entrepreneurial community, having served as both a CED FastTrac Tech instructor and lending support and advice to several Triangle-based start-ups.
