Wooing & choosing the right backer

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Wooing & choosing the right backer

  1. 1. Entrepreneurship Ref: 0002Wooing and Choosing the Right BackerBy Jim Casparie th28 April 2009Funding hasnt been harder to come by in decades, and throngs of deserving entrepreneurs are downright starvedfor it. Thats where angel investors--loosely gathered groups of well-heeled individuals with an eye toward the juicyreturns that can come from investing in early stage companies--come in.Not that you should jump at any angel willing to scratch out a check. Their deep pockets notwithstanding, someangels are more intractable and demanding than others--even while bringing less to the table in terms of expertiseand guidance. Thats why entrepreneurs should know what theyre getting into before betting their fortunes on oneof these benefactors.Some cold water first. Dismiss the notion that the choice of an angel is totally up to you--ultimately (and especiallyin this environment), angel investors choose business owners. Also, try to remember that desperation--the kind thatkicks in when your young companys very survival is at stake--chokes off all vestiges of sanity.Those parameters established, lets look at how this selection process should work when done right.The first step is preparation. This involves knowing how to whip up excitement about your prospects. The best wayto do that is by sequencing your presentation so it progressively builds your story. Time-tested tools include:--A 15 to 30 second verbal summary covering the essence of your business proposition, also called an "elevatorpitch."--An executive summary that captures, in not much more than a page, the one-of-a-kind investment opportunityyou are offering.--A clean, clear Power Point presentation, delivered in no more than 10 minutes, that answers questions like "Whoare you?", "Why are you special?", "How will you succeed?", "What do you need to ensure success (besides justmoney)?" and "When and how much will I, as the investor, get paid back?"--A comprehensive business plan that expands on the questions in your Power Point presentation but still comes inat under 25 pages. For further information on this article and the coaching programs available please contact: Image Group International Asia Pacific Head Office Tel: (+61 3) 9820 4449 E: info@imagegroup.com.au www.imagegroup.com.au ©2009
  2. 2. Preparation also involves understanding a particular angels investing style. Most angels prefer to spread their riskamong a consortium of investors. These groups are generally only interested in companies that have exceptionalgrowth potential--generally, companies that have the potential to bloom into $100 million (sales) enterprises inroughly five years. If thats not you, then you might be better off courting a so-called affinity angel--someone lookingfor a company thats focused on a market niche near and dear to their heart. Often, these investors are attracted tostart-ups with more of a social responsibility bent.Where to find your angel? These days, many have their own Web sites, and plenty tend to advertise locally. Oneimportant rule of thumb: Avoid those located further than one hour away by either car or plane; like venturecapitalists, angels prefer to invest in local companies so that they can sit on their boards and provide closesupervision.Assuming you roust a few competing takers (a nice problem to have right now), and assuming you haventsuccumbed to the thrill of finding a deep and willing pocket, theres a bit more due diligence that remains. Makesure you:--Ask about the angels track record in getting follow-on investors (such as VCs). Remember that most angelinvestments range from $500,000 to $1.5 million--still leaving you perhaps many millions short of what youllultimately need to hit your growth targets. That additional capital surely wont come from angels.--Confirm the angel is an "accredited" investor. This is a precise legal term that identifies investors who (at least intheory) grasp the risks involved. It thus limits their ability to sue you if things should go awry. Be sure to consult witha lawyer on the necessary paperwork.--Choose an angel with genuine knowledge of and connections within your industry, which often prove as or morevaluable than their money.--Dont give away the store too fast. Put another way, dont accept more money than you need to accomplish yournext major milestone. Reason: If you expect hockey-stick style sales growth, then your companys valuation willfollow.Say you need $500,000 to finish a working prototype and another $1 million to set up your distribution channels. Inthat case, dont ask for the entire $1.5 million up front; if you do, the value of your company will be based on thefact that you (currently) have no hard proof that a working prototype can be made, much less that anyone wouldwant to distribute it. By asking for just the $500,000 first, you can give away a small slice of equity, at that lowervaluation, leaving more upside for you down the road.Finally, watch out for red flags in the funding contract (also called a term sheet). You may not be able to doanything about them, but you do need to fully understand their implications. Common traps include: For further information on this article and the coaching programs available please contact: Image Group International Asia Pacific Head Office Tel: (+61 3) 9820 4449 E: info@imagegroup.com.au www.imagegroup.com.au ©2009
  3. 3. --Management substitution clauses. These allow an angel to replace any part of the management team hedeems necessary if the current team fails to meet certain milestones.--Optioned ownership. Say an angel agrees to buy 12% of your company; you might think that leaves you with88%, but those slices may not be considered equal in the eyes of an angel. The logic: An angels slice is based onan actual valuation, and thus is fully justified, while yours vests over time. According to the contract, you might ownonly 20% today while the remaining 68% would be set aside as an option "yet to be earned." Avoid these pesky--and pernicious--clauses.--Board positions. Under the guise of good corporate governance, many angels (and VCs) will try to put certainoutsiders on the board. Never forget that the board--not you--ultimately controls the company.If the deck sounds stacked against you, its because in many respects, it is. However, when it comes to raisingmoney, if you know the rules of the game, you should be able to play it better than most.Jim Casparie is chief executive of the Venture Alliance, a leading provider of advisory services to entrepreneurs For further information on this article and the coaching programs available please contact: Image Group International Asia Pacific Head Office Tel: (+61 3) 9820 4449 E: info@imagegroup.com.au www.imagegroup.com.au ©2009

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