Planning, Startups, Stories


Tim Berry on business planning, starting and growing your business, and having a life in the meantime.

Finding Your Financing: Is Angel Investment Realistic? 16

I was talking to a group of determined entrepreneurs, a food business boot camp in Corvallis, Oregon, and finishing up on business plans when one of them asked me:

What do you recommend for getting angel investment?

I recommend that unless you have a good investment opportunity, you don’t waste your time. cash pile

What’s a good investment opportunity?

  1. First, it has to be something scalable, defensible, that can grow. That means it’s either a product business, or one of those web services that scale easily. Can you add sales without adding employees? That’s a good clue to scalability.
  2. Second, you need people on board with experience in startups. It’s tough if you’re just beginning, but investors worry about risk and nothing reduces risk like having some experience. If you haven’t been involved in a startup, it’s really almost impossible to get investors to take a chance on you. Look for partners or team members who’ve had some startup experience. Ironically, having failed with a startup isn’t always bad; failure is better than no experience at all.
  3. Third, you need a believable exit strategy. And you need to be able to convince investors you really want that. Investors don’t want just a small piece of a healthy growing business; they don’t make money unless that business wants to be sold in a few years, meaning it gets acquired by a larger company, and investors get to convert their ownership back into money.

The hard part, as a speaker talking to entrepreneurs, is entrepreneurs want encouragement. But then when I think of how much time and effort some people spend trying to get investment that’s never going to happen, I try to just tell the truth.

  • Daniel

    Hi Tim,
    I’m in hotel Development and we have a finished working product that is proving to be very popular and profitable. The model is easily reproduced and it has proven to be a success with guests from all over the world (we are in the South of Spain, so we get tourists from all over). The way we are looking to expand right now is looking for underperforming hotels in good locations, offer the owner a franchise contract and remodel his property to conform to our standards. This remodeling ususally has a cost of no less than €1.5MM. Are Angel Investors something that we should be looking at or do you have a better suggestion? Thanks and great articles!

    • Daniel, look for angel investors in Spain first because investors are more comfortable closer to home than far away, because there is lower perception of risk. Also, look for people who have succeeded in and/or have interest in tourism and especially hotels, because they are more likely to understand what you’re doing. Beyond that, sorry, it’s not my expertise … I tend to deal with mostly high tech and entirely USA investments. Congratulations on your success with the first one and that it is reproduce-able. Well done.

      • Daniel

        Thanks Tim. I sincerely appreciate your comments. All the best to you and Happy Holidays!

  • katlego moela

    i have a great idea so want to sell it so can i sell it?

    • Re the great idea and can you sell it, that’s a chance of about one in a million. Is your idea that great? Is it patentable? Do you have the resources to protect it? How can you sell it if you don’t own it and you give it away every time you describe it.

      In short: No, you most probably cannot sell it.

      Tim

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  • Thanks for noting the key relevant pieces in getting angel investors. You made a valid point of partnering with a more experience person when skills and experience are lacking. Most people seek out investors when other conventional sources are not available. I believe going the route of investors is a bold and risky step which shows that either the individual does not understand the AI process or he has strong belief in his idea. Anyway getting help to flush out the idea and its validity is critical yet so many people leave out this step.

  • I agree that $1M+ investments aren’t the minimum anymore. With investors like ycombinator, there are investments of less than $50k becoming much more frequent.

    This is good news for small companies who just need a little push to get over the hump. (or past the dip as Seth Godin would say.)

  • Tim,
    Glad you’re answering the comments. We also find that a solid business plan, with strong marketing, and alternatives, works. Are you still finding most vc’s won’t look at the plan unless it’s for more than $1 million.
    John Heinrich
    Chief Mentor, American School of Entrepreneurship

    • John, thanks for the addition. Re most VCs not looking at less than $1 million, that seems like rapidly shifting sands to me, particularly with web/software/tech/apps businesses, where people are proving the concept with just low hundred thousands. It all seems more fluid than it used to be, generally lower amounts of money at different stages, and less predictable.

      The big change, I think, is that it’s faster and easier and cheaper these days to go from idea to proof of concept.

      Tim

  • Josephine WilesWarner

    Tim, thanks for this information. I am looking for investment for my alternative energy program producing biofuel in West Africa. I am in the process of developing my full business plan; therefore, this information will be noted. You are absolutely right about experience. It is important to have someone with experience for your startup business, because you do not want to fail. Please let me know if you know of anyone interested investing in biofuel development in Liberia, West Africa.

  • Some investors have told me they turn off when a startup starts projecting exit strategies. They almost always say to me “how the F would they know?” Meaning, most so-called exits are something the startup read about on a blog “go public” etc. yada yada.

    That said, if the business opportunity is a no-brainer, it is because the investor can already count on two hands a variety of companies that could buy the exit.

    SD

    • Stephen, thanks for the comment. I look for the exit strategy mainly to make sure that the entrepreneurs understand that investors only get a return if there’s an exit. And I’ve been on both sides of this question. As an entrepreneur I ignored exit strategy so much that I bought my VC investors out. But as an investor, I need to make sure the entrepreneurs understand the need for liquidity later. Tim

  • Tim:
    I have to disagree. The term “angel” investor means so many things these days. If you want millions of bucks from an organized group of high-tech angels, then sure… get scalable and smart.

    But I’ve seen plenty of restaurants, food companies, consumer product companies, and just plain dumb ideas get tens and hundreds of thousands of dollars from “angels” with little more than a careful ask.

    ( I consider any stranger who writes a check to be an angel. )

    In particular, “affinity angels” can be life-savers for small businesses. Consider doctors who invest in medical companies, or golfers who invest in golf companies… these are the kinds of angels that keep the small business world vibrant.

    I’ve seen stats from the Angel Capital Association (and Money Tree Report) that suggest more than 70% of companies are launched with “other people’s money” … and my experience suggests that this is not Friends and Family, but strangers and others who share the vision and passion of the entrepreneur.

    So… WAY more important than your three points above are passion, network and credibility. Give your entrepreneurs more of that good lovin’ and encouragement… and send them looking for people who share their passion. I think they will find the money they need.

    • Thanks David, disagreements are welcome here, and let’s hope you’re right. One word of caution, though … taking investment from people who aren’t accredited investors according to the SEC regulations can cause a lot of legal problems. There are provisions for a few “friends and family” investors, but just a few … I’m told that investment from 10 or more non-accredited investors can create serious legal hassles if a company grows, and wants more investment later. I’m not an attorney, though, so that’s second- or third-hand information.

      I am a member of an angel investor group that is a member of the Angel Capital Association, and we worry about problems with non-accredited investors in the early phases.

  • Nice Article! Short, honest and to the point.

  • I work with a Micro VC firm and one of the great ways to get noticed and build your team is to enter Business Plan Competitions, such as Tech Stars and MassChallenge.

    I often prowl the entrants to see what is new and exciting in the spaces that are of interest to me.