Last week the newly-rebranded Perth Angels ran a breakfast session and then a masterclass in Angel Investing with Jordan Green, the founder of the Melbourne Angels. I went along to learn all about Angel investing.
The one thing that Jordan emphasised is that Angels have to be on the same side as founders, part of the business and helping it succeed. Building a successful business is hard, and lots of moving parts need to align and work together to make it happen. Having a purely self-interested investor in that mix will make things harder and result in a broken business. Angels must be willing to work in the best interests of the business.
Angels usually invest in groups. There will be a lead Angel, who will be involved in the business to some degree, but the bulk of the money will be provided by a group of Angels. This helps reduce risk and improve the number of deals for the Angels, and is normal practice. The Angel group will normally appoint a non-executive director to the board of the business.
Angels usually invest in the $50K to $250K range, and opinions are divided whether they will re-invest in further rounds or only fund once. Some Angels have a strict policy of only investing once, others are more flexible.
To make your startup more attractive to an Angel, there are a few things you can do:
- Have traction. Ideas are worthless (as we know). Having customers is the biggest single thing that makes a business attractive to investors of all types. Having said that, pitching a good idea to Angels isn’t a stupid thing to do, but it’s less likely to work than if you’ve actually tested the idea and got some customers.
- Have a clear business plan. It doesn’t have to be a 40-page MBA special. But it does have to be better than the Underpants Gnomes. It should clearly show what problem is being solved, who the customer is, how the solution works, and that the business can make money providing that solution to those customers.
- Have an idea about exit. Angels prefer trade sales as their exit, because it’s the cleanest with the highest value. They don’t consider IPO’s to be an exit (because of the strings attached). The perfect Angel investment is a business that plans to build value over a relatively fixed period of time and then sell out to a known buyer in a trade sale.
- Angels don’t consider themselves part of an escalator of investment. It doesn’t start with Friends, Fools & Family, then Angels, and then institutional investment as a strategy. Angels prefer to be the final investment required before the exit (as most investors do). Pitching Angels with a “and then we’ll get a VC to invest in two years’ time” is not something that Angels want to hear.
- Angels want to invest in businesses that they can contribute to, or that at least the lead Angel can contribute to. At least someone in the group needs to know something about the industry the business is in. There’s not a lot that you can do as a startup about this, but at least be aware that if you’re in a niche industry, this may be a concern for the Angels.
- However, Angels are (in Jordan’s words) “touched by the crazy” and want to be part of the adventure of a startup. They do this because they enjoy it. Part of the reason for investment will be an intuitive “gut instinct” about the business that is affected by this. Make sure your pitch appeals to this “wild ride” aspect.
- Co-investors are a source of drama and conflict. Businesses with lots of small investors are less appealing to Angels. Try to tidy up your equity allocations before pitching if possible.
The process for an Angel group (such as Perth Angels) is:
- Screening. Businesses approach the Angel group with a possible pitch. The Angel group divide the screening job amongst themselves and a few people look at the businesses to see if they should be progressed. Usually screening is done with a set of formal criteria, even if those formal criteria include an emotional component.
- Presentation. Businesses who have made it past Screening are invited to pitch to the group. Perth Angels is aiming for 3-4 Pitch sessions per year, each looking at 3-5 pitches, so for Perth there are between 9 and 20 Angel pitches each year. At the pitch night I was invited to earlier this year all 3 pitches were selected to go further in the process as there were some Angels interested in investing in each of them. I understand this isn’t normal, but it does show the increased appetite for Angel investment in Perth.
- Evaluation. After the pitch, the interested Angels review the business and get into the nitty gritty of talking to the founder(s) and reviewing the business.
- Term Sheet. If the business is still good post-evaluation, then a term sheet detailing the investment proposed (and the terms of that investment) is sent to the business.
- Due Diligence. If the business finds the terms acceptable, then due diligence by legal or finance professionals is undertaken. The goal of this is to determine if the claims made by the business in evaluation are realistic and that there are no hidden problems in the business.
- Investment. A contract reflecting the terms agreed in the Terms Sheet is drawn up and signed, and money is transferred.
- Management. The non-exec director (if applicable) is appointed and reports back regularly to the group. The investment is monitored by the group, and the exit strategy is updated accordingly.
- Exit. The business is (usually) bought out, some due diligence on the acquirer is done by the group. The Angels receive their money back with any value appreciation from the investment.
Of course, the first casualty of any business is the plan. Angel groups are usually experienced entrepreneurs, and they know that things can go pear-shaped for lots of reasons. Prompt, clear, honest communication is the bedrock of maintaining trust between the founders and the investors in any business. This goes double for Angels, they’ve usually seen trouble before and can smell it a mile off. Usually they have a clue about what to do about it, too.
The session with Jordan was fascinating, and gave me an insight into a world I aspire to join one day. I strongly recommend listening to him speak if you get the chance.
