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$tart Smarts - 10 Tips on Raising Capital from Angel Investors
By:John Logan
John Logan knows what it's like to be turned down.
“An insurance company start-up is not exactly an Angel investment darling.” said Logan in a recent telephone conversation. “Not to mention we'll be a little controversial. They love you right up until it's time to write the check.”
Controversial is an understatement since John Logan is the founder and CEO of SafeGuard Guaranty Corporation which will be the first insurance company in the world to offer insurance against divorce globally some time next year.
“After my divorce I did some quick accounting and realized that I had spent the equivalent of nearly half of my annual income in just legal fees. Adding in all the other related costs including setting up an entirely new household put me in such a dire financial position that it took me years to recover. I knew I couldn't be the only person in the world to suffer though this.” Logan recounted.
And so, says Logan, began nearly five years of research before incorporating his company and starting the search for funding this venture.
“It's just a question of time for us to find the final few dollars need. We know this will only appeal to a select few investors for a number of reasons, but we also know those few will be richly rewarded.” Logan said. “This is a nearly 200 billion dollar market that we'll monopolize for at least a while. And we already know the demand is there.”
But raising the capital SafeGuard already has in its coffers has been a laborious process. Insurance is not a sector that is known for innovation and of late, the industry in general has received a lot of unwelcome scrutiny and bad press.
“A lot of Angel investors come from technology or some form of science related industry or even real estate, so they tend to invest in what they know. It's an incredibly tough courtship to transform someone's thinking to grasp an industry they're unfamiliar with, let alone the fact that we've created a whole new business model. You don't readily find Angel groups or networks whose investment criteria focuses on insurance.” said Logan. “Raising money for something this unusual can be a maddening process.”
So what guidance does this serial entrepreneur have for others contemplating raising capital via Angel investment?
“Before you do anything, make sure your family is on board.” Logan says. “This can be a long and financially draining process that may require sacrifices you will never have considered before. Don't risk everything trying to reach your dream or it may become a nightmare.”
Logan gives these key points to reflect on:
1. Do your homework. Sending your business plan for a new consumer product to an Angel group whose investment criteria is strictly life science technology is a waste of your time and theirs. Make sure you're a good fit for what they're looking for.
2. Ask them what they look for. Most Angel websites will give you explanations of the investment criteria they seek. Many, like the former Apprentice winner Kelly Perdew's Angel-leveraged Capital fund (www.angel-leveraged.com ), will literally spell it out for you point by point. If you can't find that kind of information, contact them and ask.
3. Begin with the end in mind. Aside from the obvious Stephen Covey reference, what this means is that beyond the expected common sense things like a good management team, top-notch business plan, realistic finances, etc., an exit strategy is a key component of any Angel's decision making process. They want to know how and when they can get their money out. Sooner (one or two years) is better than later (five to seven years). Don't expect them to read your mind. Spell it out to them.
4. Showmanship. Not P.T. Barnum stuff, but if you're not the best presenter on the team, CEO or not, let someone who is be “the face” of the company. There is a fine line between a good presentation and a horrible one. Follow Guy Kawasaki's 10-20-30 rule of PowerPoint (). And be able to give the presentation blindfolded and backwards.
5. Know your stuff. Nothing screams “Run away! Run away!” to an Angel more than an entrepreneur who obviously hasn't done his homework and anticipated every question that anyone would ever ask. If you think you'll be pressed for time, create a FAQ sheet and make it available to Angels before and after the presentation.
6. Know your limitations. Everyone says they've got a “proven management team” but the truth is if they were truly proven you wouldn't be talking to Angels about raising $1-3 million, you'd be talking to VCs about raising $10-30 million. Especially if your goal is to eventually do an IPO, know that the team that gets the business rolling is not necessarily the same one that runs the next Google. And that includes the CEO. Unless your forte is running Fortune 100 companies, don't expect investors to believe you can just because you're the largest shareholder.
7. It's the numbers, stupid. I've never hit right on my five year projections and I've never met anyone psychic enough who has. You're either way over and figuring how to keep it that way or way under and frantically hunting for a correction. In the latter case, the likelihood that you had a real business plan that can change as economic factors change is slim. If your plan hits a home run in the first two years, great, but any further out is speculation pure and simple. Don't kid yourself into believing that any Angel will look at your 10 year numbers and salivate with greed.
8. Know the competition. Even if you've found the Holy Grail in a truly untapped market, there WILL be competition. Probably from the day you launch. Your job is to know who that is or will be. And how that competition will impact your company in every way. If you don't, buy some lottery tickets because no Angel will take you seriously.
9. Be prepared to negotiate. Your valuation, regardless of who or how you arrived at it, is simply a starting point. If someone if going to fund a big chunk of your company, you had better have wiggle room.
10. Leave your Ego at home. Confidence is a good thing. Angels like entrepreneurs that show no doubt in their abilities. However, arrogance or defending a point that you can't absolutely prove beyond a shadow of a doubt is self-defeating. Sure you'll run into pompous megalomaniac know-it-alls from time to time, just remember that this isn't a sales job where every “No” brings you that much closer to a “Yes”. There are no guarantees in finding Angels, so bring a thick skin and know that start-ups and children are not the same so don't act like you're losing custody if you have to give up more control than you originally wanted.
The bottom line is that there are many subtle factors outside of getting the major components of your business in order. Battle-hardened entrepreneurs laugh it off as part of the process, but for some it can be like hunting Sasquatch. For others it's like trying to catch spawning trout by hand. In any case, it can be frustrating and exhausting both emotionally and monetarily, so unless you're extremely lucky, don't expect Angels to be beating a path to your door. The money is out there, there's no question about that. Educate yourself and your team as much as possible BEFORE the search begins, and good hunting.
About the author: Devaland Dunnigan is a free lance writer and entrepreneur who spends way too much time communing with nature in the wilds of the Northwest. Devaland can be reached at dcdunnigan@hotmail.com.
About John Logan: John Logan is Chairman and CEO of SafeGuard Guaranty Corporation, a Nevis based insurance holding company with US Operations HQ in North Carolina. Mr. Logan can be reached at john.logan@safeguardguaranty.com.
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Article keywords: Angel investors, raising capital, funding, start-ups, entrepreneur, SafeGuard, John Logan
Article Source: http://www.articles2k.com
Devaland Dunnigan is a free lance writer and entrepreneur who spends way too much time communing with nature in the wilds of the Northwest.
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