Friday, February 6, 2009

How to Attract Angel Investors

Few entrepreneurs that I’ve met know much about the Angel funding process. As an entrepreneur or business owner just how do you go about attracting South African angel investor firms. With the South African entrepreneurial culture developing by the day, competition funding is heating up and any advantages that you can bring to the table may benefit you in the long term.

At a recent meeting with a number of angel investors around the table I asked the questions, "what do Angel Investors look for in companies that they fund. Is there a specific process that is followed, and what advice could they provide that we can share with entrepreneurs at South Africa's Investors Network." Most Investors around the table agreed that the typical process they have used to fund companies in the past has changed drastically due to the recent economic downturn. One this was certain though and perhaps surprisingly so, most if not all of the investors were still very keen to attract or find companies they can invest in.

Angel Investors are often the first professional investors in many start-ups, outside of friends and families. They typically invest anywhere from R200,000 to R2 million, preferably in a Series A round, which often provides the investors with 15-30% of the company depending on the structure of the deal. Many Angel Investors are often former successful entrepreneurs who like to offer significant strategic value to the company in addition to the financial capital that they are providing. All the Investors agreed strongly that the strategic value that they can provide is often times more important than just the financial capital.

Angel Investors look for many things from entrepreneurs pitching them, however there were two key points that stood out the most. First, it is highly improbable, not impossible, but highly improbable for you to get invited to pitch to an Angel Group by simply submitting your business plan online. Most Investors said that 95% of the companies that they funded were first introduced through a personal or professional relationship, so start networking your way in. Second, aside from the business plan, and all the great financial charts you’ll have to share, the most important question you’ll have to answer and persuade the investors on, is your exit strategy.

Your exit strategy must be thought out in precise detail, because your company will take very different paths if you are planning on an IPO 5 years down the road or would like to get acquired. Getting acquired is not as simple as many entrepreneurs believe or hope. The Investors strongly agreed that you must lay out a plan to form strategic partnerships with companies whom would be likely acquirers. Angel Investors typically have an exit time horizon of 5-7 years and they demand that entrepreneurs pitching for there money have a clear and practical exit strategy within that timeframe. The Investors all had said that they chose not to invest in specific companies, not because they didn’t’ believe in the business, but because they didn’t believe that the company would be able to exit within 5-7 years.

Another interesting question was asked by one of the other entrepreneurs at the meeting. She wanted to know weather it is better to go after 5% of a R1 billion market or go after 50% of a R100 million market? The clear consensus on this question was it always is better to go after larger market share from smaller markets. A company with only 5% market share has no sustainable strategic advantage, and with out that advantage, they are an unattractive acquisition or Public offer candidate.

Thank you to James Garvin and his team for their contribution to this article

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