Inside advice on how to obtain angel funding from a member of the New York Angels.
When I started my company 40 years ago, angel investing was a term which really meant friends and family, because there were no angel investment groups. These people were truly angels. They invested either because they knew and trusted you, or because they knew and trusted their instincts about the industry you were about to disrupt. They often gave you the money with no formal agreement. Today, in the USA, more than 700 angel groups await your pitch – provided you can pass the preliminary screenings. So how do you do that?
First of all, some of these groups specialize in specific industries, like healthcare or tech. Others prefer submissions from a specific geographic area, according to their charter. Some groups allow their members to invest individually, others raise a fund from their members, and they decide which startups to invest in by committee or democratically, by voting. Some investors – including the New York Angels – invest both ways. Some groups prefer a certain size investment, like under $500,000, while others can plow over a million dollars to a deal they really like, and even make follow-on investments, so do your homework so you don’t waste your time.
Here’s a list of most of the angel investment groups in the USA. This list comes from the Angel Capital Association (ACA) – the trade association for angel groups. This association does not make investments in startups – it promotes best practices for angel investing to its member angel groups. They also provide their members with deal documents such as term sheets and convertible note boilerplates, and education on the details when using these documents.
Here’s a tip for you that I haven’t seen publicized elsewhere:
The ACA has an annual conference for its members. They offer a very few tables for startups at this conference that the members can look over during the intermissions from their educational seminars. If you are able to sign up for one of these tables, you will have the opportunity to personally present your startup to literally hundreds of angels from all around the USA.
But getting back to the point: How to find angel investment for YOUR startup. First, review the attached link of angel groups. Find out which ones are suitable for your startup. Then you will need to apply to enter the competition via their screening procedure.
Don’t waste your time or theirs by applying to all the angel groups. Focus. Prioritize.
Angel groups NEED applicants and they WANT applicants that suit their investment criteria. Still, they turn down a majority of applicants because they get so many. Don’t use a lot of superlatives in your description of your application. Nobody will be turned on by your claiming to be the next Amazon or Facebook. Be confident and direct.
The screenings usually take place once a month and each applicant may get 10 minutes. A screening committee of the group will hear 25 to 50 pitches each month. Then they will choose 2 – 5 each month to present their startup at their investment meeting. Be prepared. Put together a presentation like you see on Shark Tank, but it’s NOT like Shark Tank. Questions will come up that you’ll need to be prepared to answer, but usually a decision is not going to follow immediately.
Many angel groups use a SaaS platform (see: Gust.com) to communicate within the group about their interest in individual deals. They indicate their interest level and exchange comments about each “deal.” Entrepreneurs do not have access to the investor side. Gust.com also has an entrepreneur platform where you can research investors and investor groups and place your pitch deck, so investors have access to it. Check it out.
It’s good to understand what makes an angel investor tick. It’s NOT the money they stand to make. Why? Because realistically most angel deals FAIL. They are accustomed to losing their money and they’d rather not, but it’s just a reality. Angels, for the most part, are successful entrepreneurs who have amassed enough money to use their expertise (whatever it is) to be a part of the disruptive new movement that’s going on. They want to use their experience and knowledge to be part of an exciting venture with innovative entrepreneurs. Oh, and maybe make a fantastic score once or twice in their angel career.
Angels DON’T want to run your company or steal your ideas. They want YOU to step up and make it a success and they want to help, usually by serving on your Board of Directors. They have seen every way a company can fail, and they want you to be successful. Most angels won’t invest in a deal unless they have a really good feeling about the key entrepreneur. Some angels say that’s the MOST IMPORTANT element in their decision.
Start by forming a Delaware C Corporation. Make sure you form a DELAWARE corporation. If you’re looking to scale-up a great idea with investors DON’T start with an LLC (Limited Liability Company). LLCs are the right entity for a business that won’t be seeking investors, but not for a potentially high-growth startup.
My best advice is GO FOR IT.
There’s only one way to be enormously successful in the entrepreneurial-friendly USA, and that’s to start a company and make it work. It’s not easy, but look at how many people succeed at it. If you don’t try, it won’t happen.
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There is 1 comment left for Finding Angel Investors for Your CompanyLeopoldo said: Tuesday, May 19, 2020
Thank you for this interesting post. Some startup could require to request patents over some of their inventions. What is the best strategy for a C-Corp owners to deal with patents registrations when he/she is looking for Angel Investors too? What are the usual deals in these subjects?HBS Staff replied: Tuesday, May 19, 2020
Great question. Having a patent application is always a big plus with angels when looking at a startup opportunity, even though an application is not assurance that patent protection will be granted.
I would always recommend that you engage the services of an attorney specifically trained to write and maintain patents. Writing a patent is an art. The chances of a patent being issued or granted will be the judgement of the Patent Examiner and the best patent attorneys know some of the examiners and are aware of the other patents they will be comparing your patent application to. This is VERY important.
When applying for a patent the inventor and the owner of the patent are two separate issues. The inventor should be listed as the actual inventor or inventors, but the owner is whoever the inventor names as the owner. Of course, if the inventor does NOT name the corporation that’s raising the money as the owner then the potential investors will have a problem and may choose not to invest because their investment would be subject to whoever does own the patent.
So, if you’re raising money from investors your patent applications should always name the company as the owner.
Of course, there is a chance you’ll be using someone else’s patent for your product. In that case you would typically engage in a licensing agreement with the actual owner to be certain that the company will have the exclusive right, or a clearly defined non-exclusive right, to use the patent in the area that the patent is valid, such as the United States or, perhaps a number of different countries. If that’s the case, it would be important that the terms of the license, including the price for licensing of the patent be explicit including any relevant volume pricing or startup pricing vs. ongoing licensing costs.
All of this is a specialty and there are experts in your field of “the art” that you should depend on. These attorneys are not just your corporate attorneys, they specialize in narrow fields like automotive patents or health care durable inventions or process patents. Research these firms and individuals extensively before you pick one because you are signing up for a huge long-term ongoing expense when you do.