Book Review Revision:Angel Financing for Entrepreneursby: Katrina ThanhMarch 11, 2011
Thanh 1 Angel Financing for Entrepreneurs by Susan L. Preston Most businesses starts off in the same way, they struggle to find the rightfunds necessary in order to start their businesses. In order to acquire these funds,businesses must find an outside source to finance their startup. In the book, AngelFinancing, for Entrepreneurs by Susan L. Preston, she states, “Raising capital is hardwork and you must be well prepared for every opportunity to pitch your company,either planned or unplanned” (Preston, 1). By always staying prepared forunexpected situations, a company can introduce their business plan through anenticing pitch to attract financers, angel financers to be specific. Angel investors canbe the key to a successful business. The reason being is that angel investors “havevarying degrees of sophistication and experience…they are interested in companieswith great growth potential; companies with a large market potential and a strongpath to profitability (Preston, 2)”. Of course what defines angel investors is thatthey “have a healthy return on investment and tend to have the most lucrativereturns, which matches the high level of risk they take for providing the earliestprofessional investment dollars in a company” (Preston, 7). Preston also writes that,angel investors are a ,”high-net-worth individual who takes a big risk on one or twopeople at the beginning stages of a company. They invest locally and provideconsultation, direction and advice” (6). They play an active role in the developmentof the company in order to oversee the progression of the company’s growth todetermine whether or not their investment will bring them back a large profit ornot. The book Angel Financing for Entrepreneurs goes in depth and providesstrategic ways how to understand the ways angel investors think, their expectations,the investment analysis process, and the post-investment requirements. In order to understand how angel financers think, understand what they lookfor. One important characteristic angel financers look for is passion. When investorssee passion, they see “excitement in which the entrepreneur speaks of an idea andcompany…it also means absolute commitment to make the dream a reality”(Preston, 83). They want to see a drive and charisma for why and how one will bestarting up their business. Another importance for entrepreneurs is they should“address important financial milestones in their executive summary, business plan,and presentation in differing degrees of complexity and their financial documentsneed to support assertions and forecasts” (Preston, 56). The reason that angelinvestors want to see all of these components is to be certain not only how thebusiness will create a profit, but also how they will receive their return oninvestment within the next 3-5 years. Providing detailed data of “incomestatements, balance sheets, and cash flow statements allows angel investors withthree types of information: revenue, margin, and profitability” (Preston, 59). Angelinvestors will be able to see a company’s to seriousness in wanting to start thebusiness as well as preparedness for future outcomes. They will also feel reassuredthat their money will be in good hands once invested. Besides having a goodbusiness plan and passion, investors want to see a company with a good
Thanh 2management team. A management team must “have strong compatibility,complementary skill sets…and coachable” (Preston, 84). With a strong team, theyrepresent the company and are the glue to making the projects and the companygoals to take place. The team is the face of the company willing to accept change inorder for the company to grow. Angel financers will not give their money freely, soin order to make a good impression, it is important to address the financial aspectsof a business clearly and in great detail. Although it is important to meet the expectations of angel investors, it is justas important to know where and how to look for an investor. Angel investors can besearched for through “angel organizations and possibly other services such as onlinematching sites (Preston, 77). Some useful areas to look for investors besidesorganizations like Angel Capital Education Foundation or websites are throughprofessional service providers, investment forums, commercial banks or venturecapitalists. Using these organizations and sites can introduce you to potentialinvestors, but these investors have to be willing to give your business plan a chance.Similarly to landing a job interview, entrepreneurs should treat their introduction oftheir business proposal the same way. Making a good impression leaves a lastingeffect and can sway the opinion of an investor to decide whether to provide fundingor not. Another way of searching for angel investors is having a large network.Preston writes in her book, that networking “has potential collateral value includingidentifying possible service providers for your company and even possible strategichires. Networking can also give you a better understanding of your market, whilegiving you valuable education on investor presentations and pitches, thecompetition, general resources, and even know how to dress” (78). It does notmatter if the person one meets is an angel investor or not, depending on how wellthe idea is presented, that random person may be the link to meeting your futureangel investor. How well an idea is presented, may lead to the angel investor tointroduce your business idea to their board of investors. Whenever pitching an idea, always remember to keep it short and concise,straight to the point. Hypothetically say an angel investor becomes intrigued by anentrepreneur’s idea, the next step in this process is for the entrepreneur to presenttheir idea. There are many ways entrepreneurs may find a match to their angelinvestor, and one way is through an elevator pitch. In order to do so, Preston writes,“creating a great tag line is a place to start: a one-sentence statement of the essenceof your company, which should be based on your mission statement…communicatewhat makes your company the one to invest in: the size of your market and thestrategy you’ll use to approach it, along with your competitive advantage” (113). Bykeeping it short and sweet, the angel investor will not be overwhelmed by what youare trying to present to him or her. They will be able to quickly understand yourgoals and will try to make an effort to reach the goal with you. Having an investorpresentation is another way to further go in depth regarding your company plan.This is far more crucial to nail the presentation since it is definitely longer than a
Thanh 3sixty second-elevator pitch. During an investor presentation, “your visuals should be limited to ten slides that you can present in no more than twenty minutes and the font size should be at least thirty points…they should also focus on six aspects: what business the company is in, what important need it fills, why the solution is superior to the competition, why the plan and management team are credible, how the management team’s relevant experience will influence the execution of the plan and why the plan is a superior opportunity for the investors compared to the other deals under consideration (Preston, 114).By highlighting these aspects during a presentation, this will explain how yourcompany will make the investor money. This presentation will not only providefurther detail about what your company has to offer, it will allow the group of angelinvestors to get to know you as a person. After going through the process of sellingyour idea and making a good first impression, angel investors will continue forthwith the actual investment process.Since it is crucial to impress the prospective angel investor, taking the necessarysteps in the investment process are as follows (Preston, 134): - Get a referral to investor - Make initial contact with prospective investor - Send executive summary - Make the follow-up call and set a first meeting date - Do your presentation for potential investor - Allow investor to review your business plan - Draft term sheet - Go through due diligence process - Validate business and technology - Agree on final term sheet—parallel with due diligence - Prepare or approve final documents reflecting term sheet - Close the deal - Accept investment—often in traunches based on milestonesAuthor Preston lists these steps in order to keep the investment organized and itallows for the entrepreneur, angel investor relationship to develop. This processkeeps the potential investor updated with every activity the company is doing sothat there conflict can be avoided for the future. Having monthly meetings, butconstant contact with the angel investor is important to discuss what is going on andwhat needs to be done in the near future. During these meetings a term sheet shouldbe drafted in order to decide what type of investment will be transacted. In addition,“have your due diligence materials ready. Pulling together all your corporatedocuments, contracts, marketing materials, lead sheets, customer lists, references,and so on can take weeks, so have them prepared beforehand” (Preston, 141). Onceall the financial aspects are discussed, how much the investor will receive back (howthey will receive it) and all of the documents are reviewed and finalized, the deal is
Thanh 4closed and the money could be received as soon as estimated and the business maybegin!Of course the process of finding the perfect angel investor is pretty lengthy,including the investment process itself, but the entrepreneur is not quite done yet.The reason the entrepreneur is not finished is because he or she needs to constantlykeep the angel financer updated with what is going on. It is their money they arelending to you, so they do have a right to know. As Preston states in her book,“regardless of whether any given angel remains passive or becomes activelyinvolved as an adviser, director, or confidant, you should stay in touch with all yourinvestors and shareholders” (155). Angels will not be troublesome bothering anentrepreneur constantly about what is going on, therefore out of respect for them,letting them know quarterly updates and the status of the company is out ofgratitude. Angel investors are here to help. They are “able to help you resolve issuesor remove an impediment. They will probably give you more time to meet themilestone without losing this traunch of funding” (Preston, 156). As intimidating asthey might have been at the beginning, they are willing to guide you to the right pathwhenever there is a problem just as long as communication is involved. Throughcommunication, angels are able to “facilitate company growth, but they do not makeit happen” (Preston, 160). Angels do contribute a great deal to the birth and growthof a company. They are putting their trust in the hands of great entrepreneurs to dothe job right. Once the job is completed after many years, they too need to exit thecompany in order to enjoy their new profits.In order to retrieve their profits and leave the company happily, angels follow exitstrategies. There are two primary exit strategies, which are acquisition (or merger)and initial public offering (IPO) that angels can decide from (Preston, 161). Of thesetwo exit strategies, it is common that angel investors choose the acquisitionstrategy. This exit strategy of acquisitions involves (being bought) or less frequentlymergers (being combined with another company) are the most likely route toliquidity and a return on investment (Preston, 161). It is normal to think that oncean angel investor gains their benefits, they disappear right away. This is notnecessarily the case. Although an angel may choose to exit the company afterreceiving their benefits, angel investors will always remember whom they haveinvested in. They will always remember the deal that brought them a great deal ofmoney and will have much respect for your ability to develop a business plan thatwas enacted in a sufficient matter of time. Overall, angel investors are ultimately difficult to find and impress. Theauthor Susan Preston was able to highlight the way angels investors think, what toexpect, the investment process, and post-investment requirements thoroughly.Entrepreneurs reading this book can gain useful information and how to react indifficult situations. Not every investor they meet will want to be an angel towards anentrepreneur. Therefore it is crucial to pitch their company in an attractive way to
Thanh 5get angel investors to want to know more. Only until they find the perfect, mostwilling angel investor, will a new chapter of their business career open to themenabling proper funding to start up their company.
Thanh 6 Works CitedPreston, Susan L. Angel Financing for Entrepreneurs. San Francisco: Jossey-Bass,2007. Print.