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Angel Financing for Entrepreneurs by Susan L. Preston
Most businesses starts off in the same way, they struggle to find the right
funds necessary in order to start their businesses. In order to acquire these funds,
businesses must find an outside source to finance their startup. In the book, Angel
Financing, for Entrepreneurs by Susan L. Preston, she states, “Raising capital is hard
work and you must be well prepared for every opportunity to pitch your company,
either planned or unplanned” (Preston, 1). By always staying prepared for
unexpected situations, a company can introduce their business plan through an
enticing pitch to attract financers, angel financers to be specific. Angel investors can
be the key to a successful business. The reason being is that angel investors “have
varying degrees of sophistication and experience…they are interested in companies
with great growth potential; companies with a large market potential and a strong
path to profitability (Preston, 2)”. Of course what defines angel investors is that
they “have a healthy return on investment and tend to have the most lucrative
returns, which matches the high level of risk they take for providing the earliest
professional investment dollars in a company” (Preston, 7). Preston also writes that,
angel investors are a ,”high-net-worth individual who takes a big risk on one or two
people at the beginning stages of a company. They invest locally and provide
consultation, direction and advice” (6). They play an active role in the development
of the company in order to oversee the progression of the company’s growth to
determine whether or not their investment will bring them back a large profit or
not. The book Angel Financing for Entrepreneurs goes in depth and provides
strategic ways how to understand the ways angel investors think, their expectations,
the investment analysis process, and the post-investment requirements.
In order to understand how angel financers think, understand what they look
for. One important characteristic angel financers look for is passion. When investors
see passion, they see “excitement in which the entrepreneur speaks of an idea and
company…it also means absolute commitment to make the dream a reality”
(Preston, 83). They want to see a drive and charisma for why and how one will be
starting up their business. Another importance for entrepreneurs is they should
“address important financial milestones in their executive summary, business plan,
and presentation in differing degrees of complexity and their financial documents
need to support assertions and forecasts” (Preston, 56). The reason that angel
investors want to see all of these components is to be certain not only how the
business will create a profit, but also how they will receive their return on
investment within the next 3-5 years. Providing detailed data of “income
statements, balance sheets, and cash flow statements allows angel investors with
three types of information: revenue, margin, and profitability” (Preston, 59). Angel
investors will be able to see a company’s to seriousness in wanting to start the
business as well as preparedness for future outcomes. They will also feel reassured
that their money will be in good hands once invested. Besides having a good
business plan and passion, investors want to see a company with a good
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management team. A management team must “have strong compatibility,
complementary skill sets…and coachable” (Preston, 84). With a strong team, they
represent the company and are the glue to making the projects and the company
goals to take place. The team is the face of the company willing to accept change in
order for the company to grow. Angel financers will not give their money freely, so
in order to make a good impression, it is important to address the financial aspects
of a business clearly and in great detail.
Although it is important to meet the expectations of angel investors, it is just
as important to know where and how to look for an investor. Angel investors can be
searched for through “angel organizations and possibly other services such as online
matching sites (Preston, 77). Some useful areas to look for investors besides
organizations like Angel Capital Education Foundation or websites are through
professional service providers, investment forums, commercial banks or venture
capitalists. Using these organizations and sites can introduce you to potential
investors, but these investors have to be willing to give your business plan a chance.
Similarly to landing a job interview, entrepreneurs should treat their introduction of
their business proposal the same way. Making a good impression leaves a lasting
effect and can sway the opinion of an investor to decide whether to provide funding
or not. Another way of searching for angel investors is having a large network.
Preston writes in her book, that networking “has potential collateral value including
identifying possible service providers for your company and even possible strategic
hires. Networking can also give you a better understanding of your market, while
giving you valuable education on investor presentations and pitches, the
competition, general resources, and even know how to dress” (78). It does not
matter if the person one meets is an angel investor or not, depending on how well
the idea is presented, that random person may be the link to meeting your future
angel investor. How well an idea is presented, may lead to the angel investor to
introduce your business idea to their board of investors.
Whenever pitching an idea, always remember to keep it short and concise,
straight to the point. Hypothetically say an angel investor becomes intrigued by an
entrepreneur’s idea, the next step in this process is for the entrepreneur to present
their idea. There are many ways entrepreneurs may find a match to their angel
investor, and one way is through an elevator pitch. In order to do so, Preston writes,
“creating a great tag line is a place to start: a one-sentence statement of the essence
of your company, which should be based on your mission statement…communicate
what makes your company the one to invest in: the size of your market and the
strategy you’ll use to approach it, along with your competitive advantage” (113). By
keeping it short and sweet, the angel investor will not be overwhelmed by what you
are trying to present to him or her. They will be able to quickly understand your
goals and will try to make an effort to reach the goal with you. Having an investor
presentation is another way to further go in depth regarding your company plan.
This is far more crucial to nail the presentation since it is definitely longer than a
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sixty second-elevator pitch. During an investor presentation,
“your visuals should be limited to ten slides that you can present in no more
than twenty minutes and the font size should be at least thirty points…they
should also focus on six aspects: what business the company is in, what
important need it fills, why the solution is superior to the competition, why
the plan and management team are credible, how the management team’s
relevant experience will influence the execution of the plan and why the plan
is a superior opportunity for the investors compared to the other deals under
consideration (Preston, 114).
By highlighting these aspects during a presentation, this will explain how your
company will make the investor money. This presentation will not only provide
further detail about what your company has to offer, it will allow the group of angel
investors to get to know you as a person. After going through the process of selling
your idea and making a good first impression, angel investors will continue forth
with the actual investment process.
Since it is crucial to impress the prospective angel investor, taking the necessary
steps in the investment process are as follows (Preston, 134):
- Get a referral to investor
- Make initial contact with prospective investor
- Send executive summary
- Make the follow-up call and set a first meeting date
- Do your presentation for potential investor
- Allow investor to review your business plan
- Draft term sheet
- Go through due diligence process
- Validate business and technology
- Agree on final term sheet—parallel with due diligence
- Prepare or approve final documents reflecting term sheet
- Close the deal
- Accept investment—often in traunches based on milestones
Author Preston lists these steps in order to keep the investment organized and it
allows for the entrepreneur, angel investor relationship to develop. This process
keeps the potential investor updated with every activity the company is doing so
that there conflict can be avoided for the future. Having monthly meetings, but
constant contact with the angel investor is important to discuss what is going on and
what needs to be done in the near future. During these meetings a term sheet should
be drafted in order to decide what type of investment will be transacted. In addition,
“have your due diligence materials ready. Pulling together all your corporate
documents, contracts, marketing materials, lead sheets, customer lists, references,
and so on can take weeks, so have them prepared beforehand” (Preston, 141). Once
all the financial aspects are discussed, how much the investor will receive back (how
they will receive it) and all of the documents are reviewed and finalized, the deal is
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closed and the money could be received as soon as estimated and the business may
begin!
Of course the process of finding the perfect angel investor is pretty lengthy,
including the investment process itself, but the entrepreneur is not quite done yet.
The reason the entrepreneur is not finished is because he or she needs to constantly
keep the angel financer updated with what is going on. It is their money they are
lending to you, so they do have a right to know. As Preston states in her book,
“regardless of whether any given angel remains passive or becomes actively
involved as an adviser, director, or confidant, you should stay in touch with all your
investors and shareholders” (155). Angels will not be troublesome bothering an
entrepreneur constantly about what is going on, therefore out of respect for them,
letting them know quarterly updates and the status of the company is out of
gratitude. Angel investors are here to help. They are “able to help you resolve issues
or remove an impediment. They will probably give you more time to meet the
milestone without losing this traunch of funding” (Preston, 156). As intimidating as
they might have been at the beginning, they are willing to guide you to the right path
whenever there is a problem just as long as communication is involved. Through
communication, angels are able to “facilitate company growth, but they do not make
it happen” (Preston, 160). Angels do contribute a great deal to the birth and growth
of a company. They are putting their trust in the hands of great entrepreneurs to do
the job right. Once the job is completed after many years, they too need to exit the
company in order to enjoy their new profits.
In order to retrieve their profits and leave the company happily, angels follow exit
strategies. There are two primary exit strategies, which are acquisition (or merger)
and initial public offering (IPO) that angels can decide from (Preston, 161). Of these
two exit strategies, it is common that angel investors choose the acquisition
strategy. This exit strategy of acquisitions involves (being bought) or less frequently
mergers (being combined with another company) are the most likely route to
liquidity and a return on investment (Preston, 161). It is normal to think that once
an angel investor gains their benefits, they disappear right away. This is not
necessarily the case. Although an angel may choose to exit the company after
receiving their benefits, angel investors will always remember whom they have
invested in. They will always remember the deal that brought them a great deal of
money and will have much respect for your ability to develop a business plan that
was enacted in a sufficient matter of time.
Overall, angel investors are ultimately difficult to find and impress. The
author Susan Preston was able to highlight the way angels investors think, what to
expect, the investment process, and post-investment requirements thoroughly.
Entrepreneurs reading this book can gain useful information and how to react in
difficult situations. Not every investor they meet will want to be an angel towards an
entrepreneur. Therefore it is crucial to pitch their company in an attractive way to
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get angel investors to want to know more. Only until they find the perfect, most
willing angel investor, will a new chapter of their business career open to them
enabling proper funding to start up their company.
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Works Cited
Preston, Susan L. Angel Financing for Entrepreneurs. San Francisco: Jossey-Bass,
2007. Print.
