This is the First Part of a Free Series on Raising Seed Capital from Angel Investors
This series should be of relevance to anyone looking at raising capital down the road whether it be from angel investors or venture capitalists.
However, before we begin the series, allow me to get something off my chest. The label “angel investor” is one of the most misleading names ever given to anyone or anything. It creates significant confusion which then leads to a great deal of wasted time. A lot of first-time capital seekers infer from it that these are people who basically use their savings as grants to fund all manner of loopy or at least half-baked ideas. They also erroneously believe that the main criterion used for giving away this money is the level of the entrepreneurial wannabe’s need. The more the wannabe thinks that he or she needs the money the more obligated the investor is then to cut them a check.
Angel investing doesn’t work that way. And that’s good news because otherwise all that money would quickly be lost on spurious ventures leading to elimination of this valuable funding source.
With that point out of the way, it’s time to begin. Angel investors, or as I prefer “Individual Investors,” tend to be serious business-people who have earned their capital through work over many years and are now looking to invest a part of it with a startup, or three, in an industry they understand extremely well. Some investors made their money as entrepreneurs and others as managers working for someone else’s company. Either way, they earned their money and now wish to invest it wisely in opportunities that present the potential for a high return. In most cases, investing in the early stage is done with the hope that the company will become a “home run” and, thereby, provide them with a huge ROI. Most investors are looking for the next Google, Amazon, or Facebook. They’re not looking to become a minority shareholder in Tony’s Diner or Gretchen’s Home Cleaning Services.
The point I’m making here is that these investors are rarely interested in bankrolling just any old business especially one that looks like a lifestyle business. For those who don’t know, a lifestyle business is something that typically requires just one round of financing and then can, hopefully, provide the founder with a nice steady pay check for many years to come. These are businesses whose goal is to provide the founder with income and the opportunity to be his or her won boss. They are not designed to make any investors rich.
Lifestyle businesses can usually be spotted by the fact that they are usually one-person affairs, rarely is the all-important team there. The founder typically paints a pretty humble picture of the potential which is limited to becoming cash flow positive and hiring a few employees to fill anticipated market demand. There’s no talk of growing something that could be flipped through the funding chain to venture capitalists and ultimately the public. In other words, there’s no credible exit that would allow an investor to pull out his money after a few years. There’s also a distinct difference in energy level and commitment. The companies that attract investors tend to have teams that are already working long hours on their startup and will work even longer ones as soon as they can start drawing a pay check. In contrast lifestyle entrepreneurs make no bones about wanting to put in “a normal shift: five days per week and have time off for golf or whatever on the weekends.
So to conclude this first part in the series, so-called “angel investors” have very little about them that’s angelic. Most are hard-nosed business-people who have capital to invest in opportunities that have the potential for high returns. These investors tend to invest in companies that are operating in the industry they know best because they are interested in minimizing the inherent risks. They look for companies with credible and fully committed management teams and the potential to be flipped to a bigger party such as a venture capital firm or a corporate buyer after a few years. They’re not philanthropists out to save people who are primarily interested in entrepreneurship as a means of creating an income. Finally, they can spot most life-style business from fifty paces.