Surreal Entrepreneur

While discussing the negotiation and structure of the deals you strike up with an Angel Investor concerning how the shares will be divided and how they will be monetized, we also discussed what value you are placing on the relationship between you and that angel. This perspective is tantamount to this weeks discussion. We are going to look at what other things the angel can contribute besides just money.

While the angel has a very important part of your start up funding they also may posses other characteristics and expertise that you can tap into. Most angels come complete with a list of other qualities that you need to investigate:

• Network of other professionals
• Managerial experience
• Entrepreneurial experience

You truly need to gauge the amount of help that the person will be able to offer you in your specific company and then remember to reward them for their help. Most entrepreneurs will underestimate the amount of help that an Angel investor will be willing to give, beyond simply financial support. Also on the other hand to this perspective you need to remember that it is your business and you don’t need to have another person pointing the company in a direction that doesn’t sync up with the basic values of the company and it’s owners. So being able to slowly integrate the angel into leadership roles is a smart plan, allowing them to understand that it is your company and they are there as mainly a financier and a mentor when needed.

Your business might need the initial Angel Investors for later rounds of financing so remember that no matter what, you must keep a friendly relationship with your investors unless you are truly not interested in continuing to work with them again. However, expect every angel relationship to be a long partnership and not just a fleeting financing and dismissal. If they took interest in your initial movements they will most likely want to watch your company for a long time, most likely until your exit.

In the early stages of starting your business you will need to create a contract with an Angel Investor concerning what monetary support they will provide you with in exchange for what form and amount of profit they will gain from your company. This part is crucial because it is the first chance the angel has to see what kind of relationship you value them at. If you propose terms that are way too low on the reward scale they will think you are low-balling them and your investor could be lost if not second round investment opportunities at a minimum. However if you propose terms that are way too high on the reward scale then your not properly rewarding your own efforts in your company and your piece of the pie has just become smaller.

So when coming up with a structure (as we talked about last post) think about giving as truthful as a demand right off the bat. Most of these Angel Investors have more experience than you do with start up companies and will be able to tell when you are undervaluing their help. But also they most likely do not want to haggle with you on the details, so having a well researched and well thought out structural proposal can ensure that an Angel sticks around to help you with initial financing and maybe even financing in further rounds.

All this being said, there may be a time when you give your original and truthful proposal and you are still forced into a negotiation. This is dangerous territory to tread into, but by successfully negotiating you allow yourself an open door to ask for funding later down the road and you have shares to be able to offer them. Also by starting with a truthful proposal you know that you have done your part to meet them half way and that also means that if they are unwilling to yield you can walk out knowing you gave them the best deal that you could without hurting your future potential.

The last installation of this blog was about Evaluation, understanding Valuing is another imperative aspect of early stage investment that will allow you to think in the same terms as angel investors. If you can understand exactly how your business idea will be scrutinized by potential investors it will certainly be intelligent to present your information to them as clearly as possible to help answer those questions before they even ask.

In the book Winning Angels: The 7 Fundamentals of Early Stage Investing the authors walk you through 5 different models that Angel Investors use to value your business. The five different models are certainly worth taking a look at and they seem to be the industry standard for valuing ideas. However, these models can be a little wordy and hard to understand without having a financial background, so I’d like to paraphrase a great article by Brian Perry on TheAngelInvestor.com (an online Angel Investment publication).

He explains that there are 3 basic approaches to valuing a company:

Asset Based

Investors will look at all of the physical assets of the company and do an inventory of the value of those assets. Then they would look at the earnings that the equipment could produce.

Market Approach

This matches up the business model to other similar businesses and creates a parallel comparison about how well the business could do based on similar figures. This is difficult when the business is completely innovative and unlike any other business.

Income Approach

This focuses on the numbers that business is currently putting up. Factoring in the ability for the company to earn money and then putting equations in place to dissect the amount of money that will be spent versus the amount of money that will be coming in.

Overall you need to understand that the angel investor is looking to make a smart decision when it comes to handing money out. They are looking for ideas that will succeed and if you can show them that you are a safe bet while backing yourself up with numbers you are more likely to get their attention over the hundreds of other business jockeying for funding. Also remember that the value of your company can also be summarized as what someone would be willing to pay you for it.

For more information on these three basic forms of valuing look at Perry’s article http://www.theangelinvestor.com/article/100028;jsessionid=27A08521BE15DE213B925471FB093494/Valuations:-Understanding-The-Pieces-Of-The-Puzzle/

Or purchase Winning Angels: the 7 Fundamentals of Early Stage Investing

I’m finding myself in a tough stage where I know that the ideas that I have will bloom if given enough sunlight and water. That being said I am in a realm of business-people. These men and women do not look at intentions, they look at cold hard facts relating to where their money will go once they give it to you. More importantly they look at if their money in your hands will grow. So in this post I’d like to walk through the discoveries that I’m making in how the business world evaluates new business propositions.

A book that I am reading, Winning Angels: The 7 Fundementals of Early Stage Investing outlines the first point of the evaluating, and even possibly the most integral part of the funding process, is pitching the idea. One must know the ins and outs of not only the idea that they are gathering support for, but also one must have the charisma and presence to be able to outline convincingly that the idea is a good idea, and that the investor should investigate further. Once you have them through the door, now you have to let you financials do the talking.

Not only are the four outlined areas of focus for the investors important to have clearly displayed in any business plan, but they are also perfect places to truly start evaluating your own ideas. If one of these areas comes up without a very solid answer and a description then you could be in trouble.

1. People

Angel investors are curious about who is going to be protecting and growing their investment, this not only includes you but also your team and other investors.

2. Business opportunity

They will look closely at your business to see if there is a potential for returns based on the opportunity your business presents

3. Context

Angels will look at all of your market research to try and digest the market you will be appealing to. This is the part where they will also check to see if anyone else is doing what you’re doing , but better.

4. The Deal

This is where they want to know what you’re asking them to do, how much it will cost them, then how much it could make them in a timely manner.

Don’t expect this to be a painless process, they will be going over not only your business plan, but your personal character with a fine tooth comb in order to be confident in their money expense. At the end of the day, though, if you have supported your idea using all these four areas as guides to base your research, and you have a good reputation in your network as a trustworthy and tenacious person, you should be able to get some all important initial investments.

Let’s be clear, I am a novice stumbling through the perils of starting my own business. Until now I have been an idea man, creating something out of nothing. Bringing to light ideas that only exist on an imaginary plane. Most businesses fail because of a lack of preparation, poor understanding of competition, revenue, bookkeeping, but most importantly funding. I’ve been reading articles about funding from banks, investors, and angel investors and it is all convoluted language based on the assumption that you know what you’re doing. Let me clear some basics up before we move on to decoding entrepreneurial talk.

Sourcing in regards to angel investment means working towards receiving seed money to grow an idea past the idea phase.

Angel investment is an opportunity to receive money from an investor who is looking to help start other businesses in order to grow their own large supply of money.

When you as an entrepreneur hope to create something out of nothing, you will most likely need to find money to support that great idea to give you the necessary backing to succeed. One of my dear professors has reiterated several times to me the example of Hooter’s.

In order to own a hooters franchise you have to (or used to have to) have at least $3 million in liquid money in order to not only buy the franchise, furniture, food, staff, etc. but also to be able to survive for three years without making a dime.

This is why large franchises can grow and spread when it seems that they aren’t making any money, they are well supported financially from the start.

As an entrepreneur its imperative to recognize the opportunities that you have to receive funding. So now we’ll go back to sourcing. You need to build a network. Easier said then done, I know. However it starts with becoming a member of your local county’s chamber of commerce, for my county this was a $145.00 for the first year with an investment of $135.00 every year after that. Next you need to begin forming relationships with influential people in your community that know where the money is. Once you’ve gained the respect from these people, because you believe in your product or service and you are able to communicate that, they will be willing to help you expand your network of possible investors.

I hope this gives a basic overview of the process of sourcing for angel investing.