I Was Denied Angel Investor Funding: Now What? Why I Wrote This Guide I am the Client Services Manager at a technology-based business incubator in Indiana. I focus my attention on a number of common startup phase issues including: • Business Planning • Raising Capital through Loans and Equity Investments • Business Strategy Development • Grant Writing Assistance Through my time working with entrepreneurs, one of the biggest common issues I have noticed is lack of access to startup capital. It is no surprise that most small business owners need capital, but it was surprising how difficult it can “According to the be to secure this funding. According to the Angel Capital Education Foundation (ACEF) only 25% of angel investment Angel Capital applicants even make it past the initial pre-screening Education round. I realized that I could write a guide on how to secure angel investment capital, but the overwhelming majority of Foundation (ACEF) small business owners will never be qualified for angel only 25% of angel investment. For this reason, I decided to write a guide for the 95% of entrepreneurs that have been denied angel investment investment. What can you do now? Well I believe the applicants even following guide provides some excellent, concrete steps for entrepreneurs to take after being denied funding. make it past the initial pre- I have provided this guide for free to the world through my blog/website www.theexecutiveplan.com. My blog is simply screening round.” a hub of resources and tips for entrepreneurs as they navigate through the difficult startup phase of business. Make sure to check out the blog for new updates and feel free to connect with me through email at email@example.com. Thanks for taking the time to learn more about the startup process. Sincerely, Adam Hoeksema Founder - ExecutivePlan www.theexecutiveplan.com What to do After Being Denied Funding by Angel Investors Odds are, if you are reading this, you are one of the thousands of entrepreneurs turned down by angel investors and venture capitalists each year. Not to worry, you are not alone. According to a report distributed by the Angel Capital Education Foundation (ACEF) only between 1 and 4% of entrepreneurs that apply for angel investment funding will make it through the process to secure angel investment. Just knowing that you are not alone probably doesn’t help too much if you need this capital to grow or sustain your business. What steps can you take after your denial to keep your business alive? Do you really need angel investment? Are you ready for an investment right now? What are your options? How can you better prepare yourself for a second attempt at raising capital? These are just a few of the questions that I will attempt to answer in this comprehensive how-to guide. Step # 1 - Do you Really Need Angel Investment? The very first question to ask yourself after a failed attempt at raising angel investment is, “Do I really need angel investment?” You may not even know the answer to this question which is why the second step is quite possibly the most important thing you will ever do for your fledgling business. Step # 2 - Vision, Strategy, Tactics Plan To help identify the best type of investment, the amount of investment, and the timing of the investment in your startup, go back and develop a vision, strategy, and tactics plan to re-assess your situation. What is your vision for this business? What handful of strategies are you utilizing to reach your vision, and what day-to-day tactics are you using to best implement your strategy? If you do this one of two things will happen, you may realize you don’t need the extra capital right now to accomplish your vision, or you will determine what steps you need to take to prepare your business for success and a successful capital raising campaign. As you develop this plan consider the following example. Let’s say that your vision is to become the world’s premier online retailer of coffee mugs. This is a great vision because it is big, but also specific at the same time. You will have a number of strategies including: • Utilizing Google Adwords to attract interested potential buyers to your website • Use search engine optimization to rank high in search engine results for relevant keywords • Collaborate with large coffee wholesalers and retailers to offer your products on their website So now you have 3 strategies to accomplish your vision, but you will need day-to-day tactics to successfully implement your strategies. For instance, if you are trying to rank high in search results for “coffee mug” you might use the following tactics. • Write articles about coffee or even coffee mugs • Create a blog and develop a loyal following that will tweet and retweet your blog posts to the masses • Post comments and links to your site on other coffee related blogs or websites Now take this outline and expand. Step # 3 - Other Funding Options After completing a comprehensive vision, strategy, and tactics plan, you may realize that you don’t need angel investment funding to implement your strategies at this stage of your business. Believe it or not there are other investors out there ready and willing to back your business – your friends and family. Friends and Family: A $60 Billion Investment Opportunity Before you throw in the towel on your business because you can’t find investors you should consider the following: According to a report distributed by the Angel Capital Education Foundation#, total startup funding from venture capital funds, state funds, and angel investors totals approximately $20.8 billion annually. Surprisingly, friends and family contributed nearly 3 times the amount of capital to thousands of startups each year. With approximately $60 billion in startup funding coming from friends and family, entrepreneurs must consider this as an option as they seek to launch new businesses. Money issues between friends and family can ruin relationships. Due to the risk involved with investing in a startup, if you are requesting investment from friends and family, be sure to consider these 5 steps before you begin the capital raising process. 1. Prepare a Pitch - Just because you are requesting investment from your mom or a group of your college buddies doesn’t give you an excuse to be unprofessional. Take this opportunity and the potential risk taken by your investor seriously. Do your homework, and prepare a professional, persuasive and passionate presentation. You want your friends and family to buy into your vision, not just hand over some cash because they feel obligated or pressured. 2. Have a Game Plan - When you are seeking angel investment or venture capital investment, you will need a strong business plan, but do you really need a business plan for your friends and family? Instead, you might consider a vision, strategy, and tactics plan. You will start by developing a vision for the future of your business, then strategies to reach your vision, and finally day-to-day tactics to accomplish your strategies. For example, assume that you have a vision of becoming the leading online retailer of picture frames. One strategy may be to utilize search engine traffic to bring in customers. Finally, you will develop tactics such as building quality links to your website through social media and professional article writing to boost your rankings in the search engines. 3. Have an Exit Strategy - Angel investors and venture capitalists want to know how you intend to grow their investment. They want to know when and how you intend to repay them, with interest. Your friends and family should be no different. Although you want to disclose the fact that investing in a startup is risky, you should also outline a detailed strategy for the investor to exit profitably. Maybe you will structure the capital as a high interest loan, or maybe they will own a percentage of the business and be repaid through the profits. No matter the structure, you should have a detailed plan for repayment. 4. Consider Making it Official - Depending on the size of the investment you may consider hiring a lawyer to file the necessary paperwork to make everything official. Obviously this will give the investor peace of mind, and it should help you in the future as you seek angel investment. Making it official gives you credibility for future rounds of investment. Remember to use judgment though, if your buddy is going to invest $10,000, and the legal fees amount to $2,500, you may want to resort to a firm handshake. 5. Follow Through - Again, investing in a startup is risky, and your friends and family probably know that, but they should expect to earn a return on their investment. Don’t view this capital as a gift, instead follow through with what you promised. If things don’t go exactly as planned, be sure to communicate regularly so that they know what to expect. If at all possible, follow through. If you fail to deliver as promised, you risk your entire relationship and your ability to raise capital in the future. As you seek capital for your startup don’t neglect the $60 billion opportunity represented by friends and family, but tread carefully as you risk something far greater than the failure of your business--your relationships…. Step # 4 - Develop a Killer Elevator Pitch Because you never know who you might meet, you need to have an elevator pitch ready to go at all times. The key is practice! When someone asks you what you do they don’t want to be listening to you rambling 17 minutes later. In one minute you need to be able to explain the essence of your business. An elevator pitch is just what it sounds like, if you stepped on to an elevator with a potential investor and knew that you had 7 floors before he got off, what would you tell him about your business? These “elevator opportunities” happen everyday when someone asks, “So what do you do?” Obviously not every person you speak with is a potential investor, so you might tweak your pitch a little bit, but ultimately you need 200 to 300 words that you can recite on command when the opportunity presents itself. Here are a few guidelines as you create your elevator pitch: The Grab - Just like your executive summary needs something to immediately grab the attention of the reader, your elevator pitch should start with a statement that intrigues your audience. Maybe it is simply the name of a partner, customer, or team member that elicits interest by the name alone. Big Problem - Creatively and quickly state the problem that your company seeks to address. For example, businesses hate to constantly replace the ink cartridge for their printer. Unique Solution - Explain your unique solution to the big problem. Do this quickly. For example, if your company developed a new chemistry based nano-technology ink cartridge, don’t worry about the details of the chemistry, “You need 200 to simply explain the results. “You can print twice as much for the 300 words that you same price as traditional ink cartridges.” can recite on Vision - You explained your solution to the problem you are command when the addressing, now let them know your vision. Again keep it opportunity simple. For example, “We seek to develop and commercialize presents itself.” the best products in the ink cartridge industry.” Letting your audience know your vision is vital because they might be able to help. Request - Finally you need to request something. Don’t just say, “nice to meet you.” Maybe you can ask for their business card, a time to meet with them again, or an introduction to another VIP that you would like to network with. So take these tips, write out an elevator pitch, and then practice, practice, practice. Don’t wait to develop your elevator pitch because you never know when you might bump into the Vice President of Hewlett Packard’s Ink Cartridge Division! Step # 5 - Generate Revenue Unless you are a life sciences company developing a drug or a new medical device you need to be generating revenue before you start to seek angel investment. Of course there are exceptions, but typically an angel investor is going to want some assurance that you can sell even just 1 product before they make an investment. Also according to the Angel Capital Education Foundation, angels are looking for more than just revenue they want a scalable business model. If you can’t find a way to create $30 million in revenue in 5 years you probably are not a good fit for angel investment. Step # 6 - Get Your House in Order If you are lucky enough to make it past the prescreening round of the angel investment process, you better be ready for questions – lots of questions. Make sure you spend some time with your accountant to get your tax information and business financial statements in order. You should also take the time and the small investment to incorporate your business. Angel investors are going to expect stock ownership in a company. Don’t walk in as a sole proprietor asking for angel investment. For $100 you can incorporate your business and set yourself up for future investment. Step # 7 - Prepare a Powerful Executive Summary The executive summary is the first 2 pages of your business plan. This is typically used as a prescreening tool for angel investors. Only 25% of entrepreneurs will make it past the prescreening round so your executive summary is probably the most important 2 pages you will ever write! For an extensive guide on How to Write an Executive Summary make sure to visit: You have 2 pages. Two pages to compel your readers to ask for more. If you are successful, then the reader will absolutely need to dig into your business plan, loan application, or funding request to find out more. A successful Executive Summary is so much more than a summary – in fact, if you are starting with the intent to summarize your document you are setting yourself up for failure. An Intriguing Executive Summary Have you ever walked out of a movie saying, "Wow that was nothing like the movie preview. I thought it would be much different."? Clearly the movie preview was effective because you went to see the movie. A great movie trailer leaves you curious. You want to know more. They don't give away all the secrets or all the twists in the movie. In the same way, your executive summary should do just enough to leave the reader curious. It should not be a "summary" of the entire business or project. If a reader determines that in two pages they have a good understanding of your entire document, they have no incentive to read on or ask more questions. There are dozens of reasons you may need to write an executive summary, but for the sake of simplicity this report will cover three of the most common reasons for writing an executive summary. Loan applications. Attracting Investors. Business Plan Competitions. Before I discuss the unique characteristics that your executive summary should possess for each of these three cases, I want to borrow from famous author, speaker, and venture capitalist Guy Kawasaki's blog article "The Art of the Executive Summary". The article is written by Kawasaki's colleague, Bill Reichert. He provides an incredible generic summary and outline for your executive summary. Let me explain this outline in my own words. The main sections are as follows: The Grab Big Problem Unique Solution Market Potential Unique Selling Proposition Management Team Financial Projections Request Executive Summary Outline and Description The Grab - This section does not actually have a title, but it is probably the most important part of your entire executive summary. In two or three sentences you should tell the reader why your business is special. Maybe you have Michael Jordan as a customer and he has promoted your product on twitter for free. Maybe you just signed a partnership with Google. Maybe you were just awarded a patent, or maybe you just made your first big sale. Whatever it may be, ask yourself "so what." If it sounds reasonable to say "so what," then you didn't do an adequate job. Obviously if you just signed a partnership agreement with Google no one would say "so what" so grab their attention. Big Problem - The first ingredient of a good business idea is a Big Problem, so explain the Big Problem that your product addresses. For instance, there is too much traffic in Chicago and everyone hates traffic. Everyone in the room should be saying "yeah I hate that." Unique Solution - The big problem is the easy part. Now you have to convince the reader that you have come up with a unique solution to the big problem. If you have these two ingredients you have a good business idea. Maybe you developed a new traffic control system that will save one minute for every person in Chicago each day during their commute. One minute each day is valuable when you are talking about a couple million people. Market Potential - Elaborate on the big problem by providing stats for your industry. How much is spent annually on similar products or services and how fast is it growing. Maybe you operate an in-home health care company. With all of the health concerns brought about by aging Baby Boomers, you have a large market potential with a rapidly growing market. Unique Selling Proposition - This is where you elaborate on your unique solution. What specifically gives your product or service an advantage over the competition? Maybe your home health care service actually sends doctors to the home instead of just nurse practitioners, or maybe you guarantee same day visits so that you don't have to schedule ahead of time. Just point out why you are special. Management Team - Depending on what industry you are in, this can be one of the most important parts of your executive summary. Regardless, your investors or bankers are putting trust in the team, not the idea. Ideas are easy to come by, but executing on those ideas can only be accomplished through a strong team. Quickly show why your team has the experience and knowledge to execute your business plan. Financial Projections - Based on your market, your business model, and your historical performance, you need to develop a bottom-up financial forecast. If your plan is for a group of investors, don't spend too much time on this section because they know that you have no idea how much money you might make. Investors typically won't make a go / no-go decision based on your financial projections. They will essentially make their own financial projections. That being said, you should have some sort of graph or table with current sales and projected sales going forward for at least three years. Request - Now it is time to request either an investment, loan, grant or sales contract depending on the purpose of the executive summary. You should restate why your company provides value. Remind the reader of the big pain that you are solving and your market potential. Finally reemphasize your team and its ability to get the job done. Ask for the dollar amount that you need to reach the next major milestone for your business. Don't disclose how much equity you are willing to give up or what interest rate you are willing to pay. This should be done later through face to face negotiation. I recommend that you start by writing your executive summary following this exact outline. This will give you a great base to start from each time you need to write an executive summary for a new audience. For each new audience, you will need to analyze their specific needs and consider what they are looking for from your executive summary. Step # 8 - Write Your Business Plan If you are lucky enough to make it past the executive summary round you will probably be asked for your full business plan. The Angel Capital Education Foundation strongly suggests writing your own business plan. In fact, in their report titled, “Important Things for Entrepreneurs to Know about Angel Investors” explicitly says, “Entrepreneur MUST write plan (no consultants).” So how do you know if you have a winning business plan? I would suggest that you ask your spouse. If you are like me, you have a new "GREAT" idea every other day. How can you tell if your business plan is likely to be successful? Well, believe it or not, if your business plan can convince your spouse of your latest and greatest business idea, then you are well on your way. Here are 4 ways to know you are on the right track: 1. Your Spouse Understands the Business - This sounds simple enough, but it is difficult to explain your business in a way that anyone can understand. If your spouse can read your business plan and have an understanding of your business model, you have accomplished a lot. 2. Your Spouse Only Reads it Once - Typically, it is hard to write in a way that your reader understands the details of your plan, while keeping the plan short and sweet. If your spouse only needs to read the plan once you probably succeeded in communicating a clear and direct message. 3. Your Spouse Wants to Talk About the Business - You may often tell your spouse your ideas, and when you are done you hear silence. This is probably a sign that, either your idea stinks, or you are not successfully communicating your ideas. It is a good sign if after your spouse reads your business plan, he or she actually wants to talk about the business. 4. Your Spouse is Willing to Invest Family Resources in the Business - WOW! Now you are talking. If your spouse is willing to discuss investing precious family resources into your business idea, then you must have accomplished a great deal through your business plan. Your plan may now be ready to bring to bankers or angel investors for additional funding. Ok. Spousal consent is a great step, but it would still be a great idea to have a professional review the plan. I strongly recommend my friend Scott Pollov at www.bizplanit.com. His team of professionals will be able to review your business plan and set you on the right track toward securing angel investment. You will also find great free resources and guides like this one available for download at www.bizplanit.com. Step # 9 - Network Now it is time to network. Although you might be able to make it to the second round by simply submitting your executive summary to an angel investor group, your chances for success will skyrocket if you are introduced to the group by a reputable CPA, attorney, or another referral. Now is the time to use the elevator pitch that you have been practicing. Tell others your story and look for ways to help them. If you help others be assured that they will look for ways to help you. How to Network and Actually Get Something Out of It So often small business owners will attend a "networking event" in hopes of expanding their so called network. Instead they simply pass out business cards that end up in the trash or in a pile with all of the other business cards gathered at any given event. So what can you do to legitimately build a network that you can utilize in the future? The key is in the relationship, and there are a few ways to build relationships through networking events. 1. Be Prepared - When you go to a networking event to meet people you don't know there is essentially one way to start a conversation, "What do you do?" I hate to break it to you, but they probably don't care what you do. They are at a networking event for the same reason you are – to get something out of it personally. So when you are asked what you do, be prepared to answer with how you provide value. That is really all they want to know, how can you provide value to them, and in return they may be able to provide value to you. Just don't explain each painstaking activity that you do at work or in your business, instead stick with what value you provide others. 2. How can you Help? - As previously mentioned, at the typical networking event everyone has come to find out how they can benefit personally, not how they can benefit others. If you break that mold and ask others how you can help them, you will undoubtedly create a relationship with that person that will last beyond swapping business cards. Don't be afraid to give first. If you help others you are building a network even if you haven’t seen any benefit from it just yet. 3. Follow Up - So you get back from a networking event and have a stack of business cards. Within the next two or three days you need to follow up with the people that you want to keep connected with. A personal e-mail is alright, but a phone call is so much more memorable and more likely to result in some sort of relationship. Maybe you thought you could help someone that you met and you mentioned that to them, and gave them your business card. How great would it be for them if you actually contacted them to start helping out? They will remember that forever, and that is what you want in a network. So focus on preparing a concise explanation of how you provide value to the world, determine how you can help those you meet, and then follow up shortly thereafter. If you do these three things you will surely grow your network in a way that may actually provide value to you in the future. Grow Your Business Now that you have all of these things in place you are ready to apply for angel investor funding again. Don’t give up after one more denial because many of today’s greatest companies were once denied angel investor funding as well. As you move forward with your business venture remember to stop by www.theexecutiveplan.com frequently or sign up for our mailing list so that you have access to more free guides, tips, and resources for startup companies like yours. The ExecutivePlan is a startup business in its own right and as such we want your feedback. Please email me at firstname.lastname@example.org if you have any ideas, partnership opportunities, feedback or even criticism. I look forward to serving you and your business now and for a long time to come. Sincerely, Adam Hoeksema Founder – ExecutivePlan www.theexecutiveplan.com Sources Angel Capital Education Coundation http://www.angelcapitaleducation.org/data/Document s/Resources/AngelCapitalEducation/What_Ents_Should _Know_About_Angels.pdf The ExecutivePlan http://www.theexecutiveplan.com
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