Tuesday, October 4, 2011

How to Scare Off Angel Investors

There are countless articles out there about how to find angel investors, and how to turn business angels into the ticket your business idea needs into the big time. Have you ever considered, however, what scares business angels and angel investors away?

In this article, we look at sure-fire ways to scare business angels and angel investors away, so that you can avoid them when you are pitching.

1. No Business Plan

Again, this is an offshoot of our tendency not to take angel investors seriously. We think of them as a friend, rather than a business partner and too many people make the mistake of giving them a half baked business plan, or none at all.

An angel investor may meet with you on the golf course rather than in a boardroom, but good business angels are also shrewd business people, and they will want to know that you have a solid business plan. Make sure that yours is as good as you would offer a venture capitalist, and you should be fine.

Remember, it is better to be overly formal, and give your potential angel investor too much to work with, than it is to miss out on the deal of a lifetime because you did not bother!

2. Treat Them as Anything Other Than an Investor

Too often, we think of angel investors as something other than a ‘real’ investor. We all seem to think that because it is a less intense relationship than you would have, with say, a bank, they are something other than a fully-fledged investor.

However, think of it this way. The money they are going to put into your business is real, so the investment is as real as any other is. If your relationship is casual, that is fine, but always remember that while it is okay to be friendly, you are still dealing with a bona fide investor in your company.

3. Overvaluing Your Business

Often, you believe that you have a multi million-dollar idea. You decide to offer your potential angel investor twenty percent of your company, based on this future valuation of your business, and the deal falls through.

The reason is simple: while you see your business as having the potential to earn millions, your business angel is looking at what it is now – and probably thinks that something closer to fifty percent is fair compensation for risk.

No one wants to give away more of their business, but think of it this way: without your angel investor, you probably do not have a business, and while it hurts to sign away a sizeable chunk of that potential company, you have to consider that 100% of nothing is still nothing. Sometimes, you have to negotiate with what you have now, in order to secure the future.

4. No Exit Strategy

We entrepreneurs tend to get caught up in the here and now. We are so excited about our idea, and the potential it has to change the world, that we forget that most business angels do not want to be involved with start-ups forever.

Most angel investors want a clear-cut, documented exit strategy in place, so that they know that in five or ten years, they will get their investment back, plus a tidy profit.

Consider whether you will list your business, sell it, whether management buyout is an option, or anything else, and make it clear to potential angel investors that you will be giving them a way out of the deal after a definite time period has elapsed.

Think About Their Fears

Angel investors are a special breed. They often invest in companies that no one else would consider putting money into. They have an appetite for risk that makes them the perfect partner for start-ups, and they are usually the light at the end of a very long, very dark financing tunnel!

Make sure that you put yourself in their shoes before you pitch your idea, and identify any potential fears they have. Then do your best to allay those fears and you might just find that a business angel is your start-ups best chance at the big time after all.

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