Who are you, business angel?

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06.05.2020
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Who are you, business angel?

In recent years, from the lips of aspiring entrepreneurs you can often hear the following phrase: “I’m looking for my business angel.” The process of this search has become a kind of fashion, a certain trend. However, and this is a paradox associated with a low level of education, few people understand who the business angels really are, in what projects they invest their money, on what conditions they invest and for how long, what types of business angels exist. And most importantly – does the angel need your project exactly? Alfa Resonance Capital offers to understand these issues. Let’s start with the history.

So, a business angel (angel, angel investor, etc.) is a private venture investor that provides financial and expert support to companies in the early stages of development.
The concept of “angel” was formed in the theatrical environment of New York at the beginning of the XX century. In the Theater District around Broadway, “angels” called wealthy theater fans who invested in new productions. They were attracted by the patronage of art and close acquaintance with eminent actors and directors. Investments were risky, the “angel” made a profit only if the production was successful.
For private investors, the term was first coined by William Wetzel, a professor at the University of New Hampshire in 1978. This characteristic was provided to wealthy men with experience in entrepreneurial and managerial activities, who were not publicly investing in local companies in the early stages of development.
Wetzel’s work aroused interest in the phenomenon, and in the 80s, the United States Government Small Business Administration joined in supporting research on the non-public venture capital market, and the term became established in English.
Business angels existed long before the term appeared. For example, in 1874, Thomas Sanders and Gardiner Green Hubbard became investors in the telephone company Alexander Bell, and after a few years made a successful “exit” from a successful project. In 1878, entrepreneurs John Pirpont Morgan and Spencer Trask funded Thomas Edison’s electricity projects. Henry Ford raised $ 40,000 from five private investors to open the company in 1903. Stanford University Vice President Frederick Terman invested $ 538 in personal funds to develop the oscillators of William Hewlett and David Packard.
The informal private investment market was formed in Silicon Valley in the second half of the 20th century, and the first “business angels” were technology entrepreneurs who formed capital on military orders from the US government.
Due to the lack of a unified methodology, estimates of the number of business angels and their role in that period are very different. The most restrained researchers estimated the number of investors in the United States at 100 thousand people, and the volume of investments at $ 5 billion investment a year, others reported 720 thousand private investors who invested about 55.7 billion dollars in 87 thousand companies over the study period. According to the most daring estimates based on sociological surveys of 1983, by this time about 2 million families directly invested up to $ 300 billion in private companies. In 1987, William Wetzel estimated the total investment portfolio of business angels at $ 50 billion – twice as much capital in managing venture funds at the time of the study. He suggested that every year private investors invest in 20 thousand companies – while venture funds support from 2 to 3 thousand. An obstacle to the study of angel investments was the inability to determine the boundaries of the informal market and compile a representative sample of investors who do not advertise their activities.
According to the University of New Hampshire’s Center for Venture Financing Research Center, founded in 1986, business angels invested about $ 21 billion in 50,000 companies annually in 2002-2009, and 2010-2013 marked a noticeable market growth. According to the Center, in 2013 in the United States, about 298,800 private investors invested $ 24.8 billion in 70,730 new companies.
Business angels have played a role in the formation of many modern corporations. Richard Kramlich was the first to invest 22 thousand 500 dollars in the enterprise of Steve Jobs and Steve Wozniak – the future corporation Apple. Anita Roddick, the founder of Body Shop, was unable to get a loan to open a second store in 1976, and car dealer Jan McGlynn invested £ 4,000 in her business in exchange for half the company. In 1995, Jeff Bezos attracted 981 thousand dollars of investment in Amazon from 20 angel investors.
The first investors to Google were Sun Microsystems founder Andy Bechtolsheim and Stanford University professor David Cheriton, who invested $ 100,000 in the company. Microsoft, Dell and Intel received support from business angels at the very beginning of their development.
Historically, business angels have been the main source of external financing for new companies with potential for rapid growth. They help startups overcome the stage when the amount of resources needed for development exceeds the capabilities of the founders, but is not large enough to interest an investment fund.
Business angels invest in companies directly and operate with their own capital. An angel can invest not only in a finished project, but also in an idea that is impossible for an institutional investor. In the portfolio of a business angel, small investments prevail in number and total volume. An exception to this rule is “superangels” operating with capital commensurate with the resources of venture funds. Often angels invest together, pooling resources and reducing individual risks. According to a 2009 study of the UK angel investment market, such transactions accounted for more than 80% of the number taken into account for the year.
Sociological studies indicate the consistency of the portrait of an average business angel – a man with a university degree between the ages of 45 and 65, with entrepreneurial or managerial experience behind him. Angels are characterized by an interest in business, and among them there are rarely scientists or specialists who are not related to management – for example, doctors.
Angel investments are often described as “smart money”: angels are more willing to support projects in which they can apply their own experience. Personal involvement and expert knowledge are the fundamental difference between business angels and other private investors. Among active business angels, there are many entrepreneurs who attracted external financing in their own projects.
For developing countries, the concept of a business angel is relatively new, and the market for angel investments in them is small. The task of business angels is often carried out by grant programs, and state institutions for the development and association of business angels are engaged in the preparation of new investors.
Due to the small number of investment-attractive projects in such countries and the uncertain prospects of exit from invested companies, many business angels are guided by startups from the USA, Europe and Israel.

The main rules of any business angel:
  1. A business angel never invests the last savings or borrowed capital – angelic investments are too risky to guarantee a return on funds.
  2. A business angel collects the most diversified portfolio of projects – in this case, the success of some projects will be able to cover the failures of others.
  3. A business angel tries not to invest alone. He is looking for a co-investor experienced in a particular segment who will tell you which projects to pay attention to, how to communicate with teams, analyze the product. No co-investor, including the most status and successful ones, guarantees the absolute success of the project. But this will allow you to lose less money.
  4. Before investing, a business angel tries to understand the object of investment. He will have to at least superficially understand the area to which the future product or service belongs, and also ask the team or creator how it will work and what problems the potential user will solve. If there are answers to these questions – you can invest.
  5. A business angel never falls in love with a product. The product may seem incredibly beautiful and attractive, but if the team cannot explain how they will conquer the market, most likely, you should not expect a positive result. The essence of the product, its advantages over competitors should be as simple as possible for understanding a business angel. If this is not the case, then in the end he finds himself in a project with huge investments, a beautiful product and without a future.
  6. The business angel does not seek, in exchange for investments, to get the largest share in the startup. If the team is ready to do such a thing, most likely they will take the money and stop considering the project their own. And they themselves will become hired employees of a business angel. If a substantial share in the startup is offered for cents, the angel does not flatter himself. Probably the startup and its product are already not viable and will soon cease to exist.
  7. A business angel always remembers that it invests in a project, rather than buying it. He does not seek to gain control over him and does not try to control every step of the team. If this cannot be avoided, then this is no longer a venture investment, but a personal project of an investor. For successful angel investments you need to trust the team. If there is no trust, it is better to bypass the startup side.
  8. A business angel understands perfectly well: angel investments are money that is actually lost. If the company shoots, it rises in price and it turns out to return its investments with interest – this is hope. The path to success can last for years.

Indeed, one of the most modern types of investors is business angels. This, however, does not mean that you should accept money from any angel. Choosing the right type of business angel is also an important success factor. There are the following types of business angels and types of angel investments:
Angels counting on return on investment (Return on Investment Angels). The most important thing you need to know about them is that they invest only when everything is fine on the market. Such investors are mainly associated with financial rewards that they can receive when considering investments with a high degree of risk. For this type of angel, investing in startups is another important addition to their already diversified investment portfolio.
Corporate Angels. These angels are most often former business leaders. While it seems that their investments in your business are made only for generating income, in fact they are looking for a paid and privileged position in the company in which they invest.
High-Tech Angels. Although these investors are the fewest, experience shows that the investments made by them in modern technologies are very significant. They value the profitability of a business as much as they value the launch of new technology on the market.
Entrepreneurial Angels. These are successful investors who have their own business, which provides them with a constant flow of funds for investment in enterprises with a high degree of risk. Although they make every effort to help entrepreneurs start their own business, they do not actively interfere with the company.
Fundamental Angels (Core Angels). These are investors with extensive business experience who have accumulated huge cash reserves over a long period of time. An important fact about these investors is that they tend to make high-risk investments that diversify their investment portfolio, despite the losses. These Angels not only make capital investments, but often share useful knowledge.
Professional Angels. As professionals in their respective fields, these angels invest in companies operating only in the same segments as their own. Sometimes, they can invest several companies at the same time. Professional angels are extremely useful during the initial capital investment phase.
Micromanagement Angels. They are considered the most serious types of investors. While most of them were born in wealthy families with high social status, many others acquire wealth through hard work. These investors, as a rule, seek to enter the management of the company. After that, they are trying in every possible way to involve the invested startup in their own business strategies.

Key questions and answers:
  1. How much does a business angel usually invest in a company? Typically, a business angel invests from $ 25 thousand to $ 100 thousand in one project, but can invest more.
  2. What are the six most important things for an angel investor? This is what business angels most often worry about:
  • Qualification, enthusiasm, responsibility and honesty of the founders;
  • Opportunities of the market, which the company focuses on, and its growth potential;
  • A clearly defined business plan and any early evidence of its adequacy;
  • Interesting technology or intellectual property;
  • Competent assessment with rational terms;
  • The ability to attract additional rounds of financing in the growth process.
  1. What do angel investors want initially to see in an entrepreneur?
  • Clear and clear presentation of the project;
  • Project summary or presentation;
  • A prototype or working model of the proposed product or service (or at least a drawing);
  • First users or customers.
  1. How long does the process of attracting angelic investments take? Usually attracting angelic investments takes much longer than you expect, and it will be much more difficult than it seems. You not only need to find the right investor who has expertise in your industry, but also go through meetings, asset verification procedures, signing agreements and conditions, etc. etc. Attracting investment can be a very lengthy process.
  2. What financial issues can an entrepreneur expect from an angel?
  • How much money do you attract?
  • How much will these funds be for you?
  • How much will you grow monthly?
  • Do you have a detailed financial plan for the next two years?
  • What are the key hypotheses of your project?
  • What are the main cost items in your product or service?
  • What are your savings points?
  • What is the projected gross margin?
  1. What questions should an entrepreneur expect regarding marketing and user engagement? Angel investor wants to understand how the company plans to promote itself in the market, how much it will cost to attract each client and the long-term cost of one client. Therefore, the entrepreneur should be ready to answer the following questions:
  • How does the company promote or plan to promote its product or service?
  • What is your PR strategy?
  • What is your social media strategy?
  • What is the cost of attracting a client?
  • How much profit will each client bring?
  • What kind of advertising do you plan to do?
  • What will be the standard sales cycle from the first contact with the client to closing the transaction?
  1. What questions can I expect regarding a team of managers and founders?
  • Who are the founders and key people in the team?
  • What experience and expertise does the team have?
  • What are the main additions to the team in the near future?
  • Why exactly your team can fulfill the business plan?
  • How many employees do you have?
  • How are the founders motivated?
  • How do you plan to develop the team in the next 12 months?
  1. How risky is angel investing? It is very risky, and the angel will invest only when he or she is sure that they will not be very upset by the loss of part or all of the investment. At best, only one in a hundred startups fires.
  2. How to find an angelic investor? There are many ways to find an angel investor:
  • Other entrepreneurs
  • Lawyers and consultants
  • Angel investor groups
  • Venture capital market participants and investment bankers
  • Crowdfunding platforms
The best way to find an angelic investor is to be introduced to him by a friend or investment colleague. Using LinkedIn for some dating can also be useful.
  1. Will an angel investor sign a non-disclosure agreement? No. An angelic investor is looking through too many deals, and you are unlikely to want to create an obstacle for him to invest in your project yourself. An entrepreneur should be careful not to disclose truly confidential information.
  2. What questions should a CEO ask a business angel? The entrepreneur must find out if a potential business angel is suitable for him. Here is a list of the most frequently asked questions:
  • Can you recommend other entrepreneurs with whom you worked?
  • How do you prefer to help your portfolio companies?
  • How much investment do you think our company will need in the future to succeed?
  • What are your relationships with venture investors who will enter our company in the next rounds?
  • Do you think you can be of help to us in the process of business growth?
  • How do you like to interact with your portfolio companies?
  • What are your other investments in our industry?
  1. What are the typical conditions for a convertible note in a sowing round? Angels often invest in startups on convertible note terms. The key points of the agreement are:
  • Unsecured or secured company assets — almost always secured.
  • Interest rate and payments – interest is usually accrued and paid not immediately.
  • Discount rate – the discount rate that an investor accepts in exchange for risky investments at an early stage, which is expressed in the discount on the size of investments in Round A. Usually this is about 20%.
  • Valuation cap is the maximum size of a company’s market valuation at which the agreement can be converted in the next investment round. For example, an indicator can be set at the threshold of $ 10 million, and if in the next round the company is valued at $ 15 million, an angel investor will give investments based on a valuation of $ 10 million. This rewards investors for the risks of investments in the early stages. . Some agreements do not contain this clause, but most angel investors insist on its availability.
  1. What are the key factors for determining the necessary company assessment in the seeding round? Ultimately, a company’s valuation is determined through negotiation, but there are some key factors that the angel will focus on in the first place, namely:
  • Experience and previous successes of the team
  • Market conditions
  • Competitive environment
  • Market opportunities
  • The amount of investment and blur share of the founders
  • The value added that the investor is expected to bring
  • Market analogues
  • Potential for a big exit.
  1. What should be in the email presentation for the investor from the entrepreneur? Angels receive hundreds of letters from startups asking them to consider investing in a company. Here are the key elements to pay attention to:
  • Tell us how you reached the investor – was this a recommendation from trusted colleagues or friends?
  • Write a few short clear points about what your company is doing, what problems it solves, and what results you’ve already received.
  • Show that the founders are competent, experienced, and “on fire” with their idea.
  • Attach a 2-3 page summary of the project or presentation in PowerPoint with 15 slides to the letter.
  1. How often should an entrepreneur give new information to his “angel”? It’s best to provide the business angel with monthly reports, regardless of whether you have good or bad news. If you have any questions, this is a good reason to get help or advice. If you need additional funding, the report may be the beginning of the discussion. Nobody likes surprises, because regular communication is necessary.
  2. What are the most common reasons a business angel refuses to invest? A business angel may refuse to fund your project for many reasons. In fact, most potential investors will refuse you. And that’s why:
  • Market opportunities or potential future business size is too small.
  • Founders do not have experience or are not burning with an idea.
  • The industry in which the startup operates is not within the scope of investor interests.
  • The presentation came from the project through a general mailing list and was not recommended by any of the friends or colleagues.
  • The financial model of the project is not convincing, and the founders could not convince the investor of the rationality of the proposed hypotheses.
  • The company is too far from the investor (most “angels” prefer to invest locally and in technology-oriented cities like New York or San Francisco).
  • The investor is not sure about the need for your product or service.
  • An investor is not sure that your company will be any different from dozens like it.
  1. What legal documents does an investor expect to see from a startup before investing? The venture investor or angel will expect that this list of documents will already be ready and drawn up by an experienced lawyer:
  • Founders Agreement
  • Charter
  • Minutes of the first meeting of the board of directors
  • Non-disclosure agreement and employment contract with all employees and contractors
  • Decision to create a Board of Directors
  • Tax Identification Number
  • Federal or state records of all wounds of issued stocks or options
  • Options program for directors and employees
  • Liability agreement for directors
  • Stock register and capitalization table
  • Agreement on the distribution of shares between the founders.
To conduct a round with angel investments, it is desirable to have the following documents:
  • Decision of the Board of Directors and owners of the company on attracting investments
  • The right to securities
  • Subscription Agreement
  • If no shares are issued, then the Convertible note agreement
  • Change to statutory documents, if necessary.
  1. What mistakes do entrepreneurs make during presentations to angel investors?
  • Do not show key market opportunities
  • Bring the whole team to the meeting, but only CEO says
  • Say that you have no competitors
  • Show uninteresting or unrealistic projects
  • Presentation too long
  • Do not run a demo
  • Not be able to explain the key hypotheses of your project
  • Fail to explain how your product or technology differs from competitors
  • Fail to explain how you use the investment and how long to wait for a return
  • Ignorance of their potential buyers and what they think
  1. What benefits does an entrepreneur get from attracting angelic investment? Besides money, a good angel investor can bring the following to the company:
  • Contacts with venture funds
  • Contacts with strategic partners
  • Tips and advice
  • Confidence in association with this investor
  • Contacts with potential customers
  • Contacts with potential employees
  • Contacts with lawyers, banks, accountants, investment bankers
  • Knowledge of the market and strategies of similar companies.
  1. How should an entrepreneur prepare for a meeting with an angel investor? There are key points that an entrepreneur should do in preparation for a meeting with a business angel:
  • View the investor profile on LinkedIn and its website
  • See if you have any common connections on LinkedIn and ask them for their opinion or advice.
  • Practice your pitch in front of an audience from which you can get honest feedback
  • See in which portfolio companies the investor invested
  • Be prepared to be interrupted
  • Be prepared to answer difficult questions, such as: “Do you think a preliminary monetary assessment is appropriate for your company?”
  • Revise and enhance your presentation in PowerPoint. Leave no more than 20 slides in it. Browse other company presentations for guidance.
  • Seek professional advice.

Attention! In the context of the new economic realities associated with the spread of COVID-19, Alfa Resonance Capital is starting to form a new and additional investment portfolio. The offer is limited. For all questions: office@arcgroupltd.eu

 

 

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