Category: Angel Investors

After providing details on management, you have hopefully given investors confidence in your team’s ability to deliver on the company’s vision. Now it is time to turn to the financial aspects of the company and investment opportunity. In presenting your company’s financials, you want to give investors an idea of the company’s revenue/profit potential. The usual way to do this is to show a summarized income statement. You would want to show a projection of the company’s revenue and income for 3-5 years into the future. If your company has been in operation for prior years, you would also want to show the actual results for revenue/income for these years. As any future predictions of revenue/income are going to be very speculative for an early stage company, the methodology you have used in building up the projections will be more important than the actual numbers themselves.

In a previous article we spoke about market size and revenue potential. You would pull in your revenue numbers you came up with to show how the company’s revenue will grow as you build your company. Just as you did a bottom up exercise to determine your revenue numbers, you would want to do a similar exercise to determine expense items. Against revenue you would want to identify your variable and fixed costs. Variable costs are any costs that are directly proportional to a unit of your product that is sold (i.e. cost to manufacture the product, credit card processing costs, etc). Fixed costs are more tied to the overall growth and size of your company (i.e. management salaries, rent, legal fees, insurance, etc). In your investment presentation you will want to show your income statement on an annual basis with separate lines for each major revenue or expense items. Typically you would show your revenue minus operating expenses to come up with EBITDA. EBITDA provides a picture of the earning potential of a company based on operations.

Investors will look your financials to try understand things such as:

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Now that you have given investors an overview of your product, market potential, and competition, they should have a good idea of what your company is all about and what its potential is. The next, and arguably most important topic, to cover is your company’s management. So why is management so important? Its because since early stage companies are risky and have a high chance of failing, investors look to the company’s management to ensure they have the experience, skillset, and connections to give the company the best chance of succeeding. A strong management team would include aspects such as:

1. The CEO has a history of successfully starting and and selling companies – i.e. there is a past track record to give confidence that he/she can do it again
2. The management team has worked together on past ventures – i.e. there is a past track record that the team works well together and there are no team dynamics issues
3. The management team has deep experience in the industry – i.e. they have the credibility and relationships in the target industry to help get traction for the company?s product/service

Now there are lots of examples of first time CEOs that have established very successful companies. So don’t take the above that I am suggesting its not possible. What I’m saying is that for outside investors that don’t know you or your company, having a past track record of successfully doing a similar activity provides more comfort. You would probably approach things the same way if you were looking to hire a key employee for your company – you would want to find somebody that has strong past work experience in doing a similar job.

Since many early stage companies will not have a fully rounded management team, here are some strategies to handle this:

Missing positions
When a company first starts out, most likely the founders are wearing multiple hats in the roles they play. As the company grows, it is natural to bring on more members of the management team to add more specialized experience (i.e. a dedicated CFO, sales director, etc). Investors will understand this, so when you talk about your management team you should highlight the positions you feel it is missing and ones you would look to hire. This will demonstrate you can accurately assess your team and understand how it will need to change as the company grows. As some angel investors are looking to get involved with a company, they may be interested in joining the team to help the company or know of somebody else who would be interested. You should also be prepared to discuss what you see as your role in the company going forward and if you see yourself as always being the CEO. There may come a time when as a founder of the company you need to bring on another person as CEO that can take the company to the next level. I will talk more on this topic in a future article on founders syndrome.

Board / advisors
Another way to enhance the experience / credibility of a company’s management team is to build up a strong board of directors or advisory board. You would want to identify people that can provide value to the company in either the experience they have (i.e. if this is your first time as CEO you would want to find somebody that is an established CEO) or in the contacts they have (i.e. find somebody that is well respected/connected in the industry your company is targeting). By having these types of people involved with your company, you will be able to consult with them to discuss issues/problems your company is facing and tap into their networks to help open doors for sales, partnerships, alliances, etc. Another benefit is that it will help out the due diligence process with investors.

Usually the first thing a group of angels will do in evaluating a company is to reach out to their network to find somebody in the industry or who knows of somebody on the company’s management team to get their insights on what they think of the company. If you have well respected people on your board or advisory board that believe enough in your company to put their name behind it and spend their time to help out, it will go a long way in establishing outside verification that your company is onto something.

In my next article, I will talk about the financial aspects of your company to cover in an investment presentation. As always, if you have any questions, comments, or suggestions for future articles feel free to contact me: craig at mapleleafangels.com

So now that you have generated interest in what your product does and its market potential, the next question from investors will be who are your competitors and what are the barriers to entry? This area of your business will be the most dynamic, especially if you have yet to launch your product or service. You will not be able to predict all possible new companies that may enter your space or how existing companies will react. As such, investors are both trying to understand how your company stacks up against competitors as well as gauge your ability to assess and position your company against competitors. This will determine the comfort level they will have that you will be able to properly identify and react to competitive threats that may arise in the future.

In our iPod case example, as it’s a pretty mature market, you would want to list off the main companies that produce cases, outline their respective market share, and discuss what your company’s advantages/disadvantages are against each competitor. When you outline the market share of each competitor, you should compare this to your financial projections on what market share your company is targeting. Investors will be using this as a benchmark to assess how realistic your financial projections are. For example, if you are in a fragmented market with many established competitors, none of which have more than 10% share, and your financial projections assume you gaining 25% share, investors will want to know why you think your company can achieve this when all your competitors could not.

Even if you are fortunate enough to have a product or service that is truly ground breaking and no other company produces anything similar, do not say that you have no competitors. Although you may have no direct competitors, your target customers probably have a variety of choices for other products or services that address their problem. For example, the Segway personal transporter may have no direct competitors. However, the target customers for Segways have many choices as to how they solve their transportation requirements: they can take public transport, use a bicycle, use a car. You would want to assess the companies that provide alternate solutions and provide commentary on your product’s advantages/disadvantages. You will also want to provide commentary how will these companies will react if your company starts to take away their customers. Will they look to stem the outflow by reducing cost of their product, attempt to lock in their customers, or will they try to develop a similar product to the one your company offers? You should also discuss other companies in un-related industries that may have expertise in some aspect that is important to produce your product. In the Segway example, a potential competitor may come from an aerospace company that has expertise in gyroscopes needed to implement the balancing mechanism. If they see your product taking off, will they want to build off this expertise and try enter your industry with a competing product?

In order to fend off companies trying to produce a similar product to the one your company offers, you need to realistically assess what is the unique expertise that your company possesses that gives it the ability to produce your product. Do you have key employees with the technical knowledge, do you have key suppliers or partners that develop parts of your product, do you have intellectual property that the company has developed. Based on this, you will want to erect barriers to entry to make it harder for a competitor to come in and duplicate your product. This can take the form of employment contracts, patents, trademarks, or exclusivity arrangements with suppliers. This will make it easier for your company to focus on growing market share rather than fending off competitors trying to offer a directly similar product at a lower price point.

One tip, although money is stretched thin in a start up and often the focus will be on funding the development of the product, it would be wise to get legal counsel early on in terms of the intellectual property protection strategy your company will take. Understanding what is patentable can be a complicated area and is something you will want a seasoned legal professional to give you advice on. This is important because when you start to engage other people (investors, partners, suppliers) in discussions about your company and what it does, you need to be careful what you disclose. If you provide information into the public domain that you may want to patent in the future, you will not be able to claim a patent anymore. Having a strong patent strategy can significantly increase the attractiveness of the company to investors, provide justification for a higher valuation, and give potential competitors a reason to buy your company rather than try to work around your patents.

In my next article I will speak about the area that is probably the most important in terms of what investors look for in a company – its management team. As always, if you have any questions, comments, or suggestions for future articles feel free to contact me: craig at mapleleafangels.com

In the last article, we discussed how you would go about describing your company’s product or service. Now that potential investors have a clear idea of what your company does, you need to show them the potential for how much money the company can make. You do this by outlining the market size potential and revenue model for your company.

First lets start with market size. The amount of market share your company will get each year is obviously highly speculative, especially for a new company offering a new product or service. However, rather than just come up with a number such as the number of customers you project to have after the first year, it is important to show the reasoning behind this number. You will need to do research to determine the total potential market you can serve and build up how you will get a share of the market.

If we take our hypothetical company that is building cases for iPods, what is the total market size? In determining the market size, you need to be specific:

Is it everybody that owns a portable MP3 player – no, you are only making cases for iPods
Is it everybody that owns an iPod – no, you are only making cases for certain models of iPods
Is it everybody that owns the specific models of iPods you are targeting – no, not everybody that owns an iPod is going to buy a case for it
Is it everybody that would purchase a case for the specific models of iPods you are targeting – maybe, but will you be attempting to sell to everybody globally day one or will you focus on one region, such as North America

By following a line of reasoning such as the above, you will be able to narrowly focus on the specific market you will be targeting and be able to give numbers in terms of how large this market is in terms of total customers or dollars. You will also want to research statistics for how much the market is growing each year.

Now that you have defined the size of the market, you need to determine how much share you will get of this market.

Here is where things become speculative as you will not have 100% certainty of the uptake of your product. However, again, the main point is not the final number. It is to show you have a well thought out reasoning so you can demonstrate you have a clear understanding on how you will launch into the market. In terms of determining what year over year share you project to get, it is best to try show how your market share is based on fundamental building blocks. For example, if your model for selling iPod cases was to establish your own retail stores as the channel to customers, you would want to show a market share based on how many cities you will establish a presence in over time & how many sales would you expect per store. Or if your model for selling iPod cases was to license designs to existing manufacturers of iPod cases, then you would want to base your market size on which manufacturers you will be able to sign up over time and how much revenue you will get per each manufacturer.

In addition to talking about the market size, you also need to ensure you clearly explain your revenue model –

• Who are your customers?
• How do you reach them to sell your product?
• What are they buying from you?

In our iPod example, depending on the business model you chose there are many different revenue models. Maybe you look to manufacture and sell your product through retail channels such as Best Buy, maybe you look to license your product to other manufacturers of iPod cases, maybe you look to give your product away for free but make money via ad placements on the case. In order to be able to properly assess a company, an investor is going to want to have a clear picture of how your company generates revenue.

When most entrepreneurs pitch what their market share and revenue potential is, they usually mention that the numbers being presented are ‘conservative’. This is good, but does not mean much to an investor. One tip would be to produce a few scenarios of how much market share and revenue your company will get over time. Since you are probably asking for investment money to execute the plan of how you will gain this market share, it is good to show a few different scenarios of what your revenue potential will be given varying levels of investment money. i.e. you may not get the full amount of investment money you are seeking so this way you will be prepared to show the implications of getting less money.

In discussing market share & revenue potential of the company, this is only one side of the equation. Expenses are also important to discus so investors can get a picture of the income potential of your company. I will cover this in part 6 (financials) of this article series. In my next article, I will talk about competition and barriers to entry. As always, if you have any questions, comments, or suggestions for future articles feel free to contact me: craig at mapleleafangels.com

In the next series of articles, I will walk through the main areas that angels evaluate when assessing a company for investment. As discussed in a previous article, there are distinct phases you will need to go through as you work through the funding process. However, the same evaluation areas will be used at each stage of the process – the only difference is in the level of detail. The areas I will cover are:

• Product / pain point
• Market potential / revenue model
• Competition / barriers to entry
• Management
• Execution strategy
• Investment potential

So lets start with product / pain point. In order to engage investors in the funding process, you will need to clearly explain what your company does and what problem or pain point its product/service is addressing. This sounds simple to do but you would be surprised how many applications or pitches I have gone through and at the end have walked away without having a clear idea what the company does.

In describing your company, it often helps to describe the problem you are trying to address. As an example, lets say you are starting a company to make cases for iPods. In this case, you would want to portray the pain point along the lines of:

• Apple is renowned for making products that have great industrial design and part of the reason people buy them is how they look
• iPods are made to be carried around so can take a lot of abuse
• The casing on iPods is prone to scratching
• Higher end iPods are expensive

We therefore feel there is a market to provide people with an external case system for iPods that protects the iPod from scratching yet does not detract from the overall look

Having described the pain point, you now must clearly explain how your company is addressing the pain point. With the example above, how many different ideas can you come up with to build a company to address the pain point? For example, maybe you try to develop a revolutionary ‘micro film’ that can cover the iPod and give it greater scratch resistance. Or maybe you look to hire well known artists and have them come up with very fashionable cases and sell them at high prices as limited numbered editions. Or maybe you will develop low cost cases made of 100% recycled materials that look plain but do the job of protecting the iPod in an environmentally friendly manner.

Each business model has its own unique challenges so this is why its important to clearly define what your company is doing so investors know what they are investing in. Most investors will use this as a high level filter. If they do not think the idea is viable or marketable, they will probably not pursue things further. i.e. why would anybody want to invest in something they do not understand or do not believe is a good idea.

One other tip is to keep things very focused. With any company there are probably opportunities for adjunct products, different revenue streams, etc. If your company is just starting out & looking for its first financing, resist the urge to try jam all of this into your company description thinking it will impress investors more to see how broad your company can be. With a start up with limited resources it is going to be hard enough to launch the initial product. Trying to do multiple things at the same time will probably not be feasible and will end up confusing investors as to what your company is.

In my next article I will cover the next and closely related evaluation area which is how you show the market potential and revenue model for your company’s product/service. As always, if you have any questions, comments, or suggestions for future articles feel free to contact me: craig at mapleleafangels.com

When you are making a pitch & ultimately getting angel investors on board with your company, its important to know who you are dealing with and what their motivations are. During a general pitch presentation to a room of angels, you will not be able to know much about who you are pitching to or what each person’s background is. So you will have to keep your pitch suitable for a broad audience. Don’t assume they will have knowledge of the industry your company operates in. As you work with angels interested in investing in your company, you will have the opportunity to get to know them better. This is important to do as you want to ensure their motivations & expectations are in line with what you have in mind.

So at the risk of over-generalizing, here are some profiles of angels & their potential motivations.

Cashed out entrepreneurs that have started & sold their own company. They know how to build and run a business. They may be looking for their next opportunity and want to get involved on the management team or board of directors.

Professional service providers such as lawyers or consultants that provide services to companies. They may be looking for early stage companies to get involved with so they can grow with them and provide increased services once the company gets more mature.

Doctors that may be interested in funding companies that are advancing technologies in their field.

Business people interested in funding companies that help work towards a cause they are interested in such as environmental friendly sources of energy.

Corporate executives looking for early stage companies that can provide a new product or service that can help the corporation they work for.

At the end of the day, all angels are investing since they want a class of investment they can participate in that offers a chance at a high return (with the downside of high risk). However, there are wide ranges of preferences for what role angels see post investment. Some want to be actively involved in helping grow the company while some would rather be passive and be hands-off. It is also important to be on the same page in terms of expectations of exit and investment return. The main point is to ensure you understand your investors expectations and the role they want to play in your company post-investment so you can properly manage to it.

In my next series of articles I will talk about the main areas angels look at when evaluating a company. As always, if you have any questions, comments, or suggestions for future articles feel free to contact me: craig at mapleleafangels.com

In my next two articles, I will talk about pitching for investment money. In this article I will talk about the stages in the pitch process. When pitching to angels through an organized angel group, there is a multi-step process you need to go through. Your end goal is obviously to close a round of financing. However depending on what stage you are at in the process your goals for that step will be different. The best analogy is thinking about the process you go through to apply for a job at a large corporation. So to illustrate, lets walk through the steps for both:

1) Initial application

Job search – you see an ad for a job in an on-line job board or in the paper. You write up a cover letter and a 2 page resume to summarize your experience and why you feel you are a good fit for the job. Somebody in the HR department reads through all the applicants and selects the ones they want to bring in for an interview.

Angel financing – you fill out the angel group’s 2-3 page application for funding. The selection committee evaluates all applications and selects the 3 they want to have present at the group’s next investment meeting.

In either example, your goal is not to get the job or get a cheque. It’s to stand out from the pack and get invited to meet in person. People often find it hard to distill their company & the investment opportunity into such a short application. However, resist the urge to try over complicate things by providing all sorts of detail & information at this stage. Your goal is to look interesting enough to be invited to the next stage where you can provide more information.

2) First interview/pitch

Job search – you meet with the HR resource who tells you about the company, reviews your work experience, asks questions and answers any questions you have. After they interview all selected candidates they determine the short list they will present to the hiring manager to interview.

Angel financing – you pitch your company at the group’s investment meeting to 30-40 angels. You have about 15 minutes to do your pitch and 10 minutes to answer questions from the group. The 10 angels that are interested in your opportunity will sign-up and form a due diligence team to investigate your company further.

Again, in both examples your goal is not to get the job or cheque. It is to come off as being a strong candidate / investment opportunity so you will get the chance to have a deeper dialog with the real decision makers. At this stage you will have the opportunity to provide more details, but not enough to comprehensively review all aspects of your company. This will all have to come out during due diligence before angels feel comfortable to invest, but don’t try cram all of this information into your pitch. You want to provide a broad overview of your company/investment opportunity that looks interesting enough that people will sign-up to take the time to investigate your company in more detail.

3) Final interviews / due diligence

Job search – you meet the position’s direct manager and go through a detailed interview to assess if you have the qualifications to do the job. If you are applying for a senior position there are probably multiple interviews with different people, technical tests, reference checks, etc. After the manager is comfortable they have all the details on all candidates, a hiring decision is made.

Angel financing – you meet with the interested angels to review your company in detail. Through a period of weeks angels look at all aspects of your company, talk with other people in your compnay’s industry, talk with your customers, do reference checks on the management team, get legal advice, etc. When they feel comfortable with the investment opportunity the deal closes & you get your cheque.

This is the stage where you need to provide all details and get the deal closed.

The main take away is that during the early stages you need to properly manage your messaging so you are presenting a crisp, clear, broad summary of your investment opportunity. Yes you will be leaving out a lot of details, yes people reading your application/hearing your pitch will have unanswered questions. But your goal is to come off as a promising & interesting investment opportunity so that you will be invited to the next stage so people can ask their questions & get into the details. By trying to over cram too much information into the early stages thinking that you want to provide people with as much information as possible, you run a greater risk people will not understand what you are trying to get across and not be interested taking the time to learn more. The best early stage presentations are the ones that provide a broad overview of all important areas and get people interested to want to take the time to learn more in subsequent meetings.

In my next article I will talk about the motivations of angels who you will be pitching to. As always, if you have any questions, comments, or suggestions for future articles feel free to contact me: craig at mapleleafangels.com