Friday, September 4, 2009

Angel Investors Prefer Preparation to Enthusiasm

I recently while using some well deserved holiday time to catch up on my reading found this great article on the New York Times. Its a real lesson for entrepreneurs, especially if you are the type that think that your enthusiasm can win you the day without to much preparation. With so many entrepreneurs often benefiting from the gift of the gab together with a solid helping charisma, you will be well advised that when it comes to Business Angels this will not always get you the deal.

The article reports that two recent studies found: Don’t get carried away when you pitch your product, because the investors may lose interest faster than you can say “almost unlimited market,” The New York Times’s Brent Bowers reports.

And one misstep — like stammering a vague reply instead of saying you do not know the answer — can kill a deal, the authors of the studies say.

Angel investors are generally wealthy people seeking promising start-ups that are too small to attract the attention of venture capitalists. The estimated 260,500 active angels in the United States are the largest source of seed and start-up capital for entrepreneurs (not counting their own savings or money from family and friends), according to Jeffrey Sohl, the director of the Center for Venture Research at the University of New Hampshire.

Even last year, as the recession gathered force, these angels spent $19.2 billion on more than 55,000 ventures, he told The Times, though that was down from $26 billion in 2007. The average investment for each deal last year was $346,500.

By contrast, venture capitalists made only 440 investments in start-ups last year, putting the bulk of their money in later stages of a company’s growth in deals that averaged $7.5 million, Mr. Sohl said. “Angels provide the seed and start-up funding that turns acorns into trees like Starbucks, FedEx, Amazon and Google,” Mr. Sohl told The Times.

Typically, entrepreneurs make their initial pitch to angels in an informal session. If their idea is judged to have promise, they may be invited to give a PowerPoint presentation followed by a question-and-answer session.

With time at a premium, it is imperative for entrepreneurs to come prepared to both meetings with solid arguments about their product’s marketability and with evidence of their commitment to their company in the form of sweat equity and their own investment, experts say.

But enthusiasm is a different matter, according to a study that was presented last week at an entrepreneurship conference at Babson College outside Boston.

“That is the trickiest part,” Richard Sudek, an angel investor and assistant professor of entrepreneurship at Chapman University in Orange, Calif., and one of the three authors of that study, told The Times. “We like you to show some excitement, but don’t force it. Being authentic is much more important. There is such a thing as quiet passion. Anything that comes across as slickness is a negative.”

Cheryl Mitteness, a doctoral candidate in entrepreneurial studies at the University of Louisville and one of Mr. Sudek’s co-authors, was even more emphatic. “Show your passion,” she told The Times, “but don’t try to be somebody that you’re not. Angels are very leery of too much enthusiasm.”

Another research paper, by Xiao-Ping Chen and Suresh Kotha of the University of Washington and Xin Yao of Wichita State University and published in The Academy of Management Journal in February, came to much the same conclusion. The effects of perceived passion, defined as cues like facial expressions, tone of voice and hand gestures, “were statistically insignificant,” the article said.

Ms. Chen, a professor at her university’s business school, called the findings “surprising,” especially since she and her colleagues often rely on such signals in their hiring decisions. “You can show your passion through preparedness, how well you’ve thought out your business plan,” she told The Times. “But the style of your presentation doesn’t matter.”

What angels are looking for, authors of both reports said, is evidence of a market opportunity with growth potential, a strong management team and an exit strategy, including a list of possible acquirers, since the eventual sale of the companies they invest in is how they make money.

“Also, angels put a high value on trustworthiness,” said Mr. Sudek of Chapman, a former entrepreneur himself and the chairman-elect of Tech Coast Angels, the largest angel group in the United States. “If you don’t know the answer to a question, say so, and promise to get back to them. Don’t fake it.”

In fact, acknowledging gaps in your knowledge and other weaknesses, and letting angels know you need their help, can add to your credibility, he told The Times.

Here are some other tips from the researchers:

— Memorize an “elevator pitch” for your product and its potential in 90 seconds or less. It will bolster your confidence, and you can recycle it to win over customers, vendors and employees.

— Consider hiring a speech coach, but only one familiar with angel investors’ thinking.

— Attend “pitching contests” that many business schools and angel groups sponsor.

— In presentations, be upbeat but realistic in your profit and revenue projections. Better yet, draw up optimistic, middle-ground and pessimistic projections to show how carefully you have thought them through.

Ted Ray, founder of Ted’s Tinctures Inc. in Mountain View, Calif., has some advice for fellow entrepreneurs, even though he is only now starting a quest for $500,000 in angel financing.

First, he said, have a product on the market. “Nothing speaks more loudly than revenue coming in,” he said. His two-year-old company, which makes an herbal remedy called FlyRight Jet Lag Formula, had sales last year of $25,000 and is on track to increase that by tenfold this year, he said.

Second, do not ask other people for money unless you have spent your own. He has put $105,000 of his savings into his firm and raised $185,000 from family and friends.

Third, the business plan you show to potential investors should be concise. He suggested using software on

Fourth, seek angels with a record of investing in your field — in his case, consumer products.

And finally, he says, explore every angle. “If an angel says no, ask him for the names of four other angels who might say yes,” Mr. Ray said. “My goal is to get 100 introductions to get 10 meetings to get three presentations to close one deal.”

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