Stay up to date on our entrepreneurs, events, research and more. Check out our June newsletter here.
Reprinted from Angel Investment Network. Original article here.
By Eva Pearce
Seeking financial support from an angel investor should be mutually advantageous. Investors are looking for great opportunities in which to invest and make money, while entrepreneurs may have great ideas but no capital. Angel investors do refuse investment opportunities and for all sorts of reasons, it may well be because they don’t consider the idea a viable one, or it is just not something that has grabbed their attention. However, sometimes the idea may well be a great one, but the investor still says no, simply because the entrepreneur hasn’t done their homework.
Pitching an investment opportunity, no matter how great the idea, requires plenty of planning. All too often, entrepreneurs go into a pitch cold and are shocked as to why the investor has declined the opportunity. They may well be onto a winner, but have been refused simply because they have not prepared properly and considered the needs of the investor, and this poor planning soon becomes evident.
The pitch is something many people looking for investment fret about, and yet it should be simple, after all, it is your business idea and if you can’t explain it, nobody else can. If you can’t explain your business idea to somebody, you can’t expect that person to want to invest. An angel investor needs to know what they are plowing their money into, so the pitch should be succinct and concise and should clearly explain what your business is about both as an outline and in detail. For instance, say you intend to provide a European wedding service where you help people get married in romantic places such as Paris, Rome or Venice and do all the arrangements for them. Your pitch should detail what exactly it is your business offers, so you should explain that for a fee you take care of everything. You organize the necessary documentation and visas, sort through the European bureaucracy, organize the photographer, buy euros on the behalf of the couple, book the hotels and arrange the flights.
Once you have set up the business idea, you need to have also planned for any questions. For instance, after pitching the European wedding idea, an investor may ask what happens if the hotels are all booked, or do you charge commission for buying euros or booking the hotel? What happens if the couple changes their mind? If you can’t answer these questions then you can’t expect the angel investor to want to give you any money.
Poor business plan
Too many people asking investors for money have either a poor business plan or none at all. A business plan should outline not just the initial idea, but also outline every aspect of the aims for the business and possible threats. This should include how it will be marketed, operational information such as where you will be based, the running and set up costs, possible threats to the business, any potential barriers to success, a sales forecast over three years, and what return you are offering for any investment.
Of course, if it is a new business you may have no idea of what your sales forecast or costs may be. However, an investor will have expected you to research similar ideas and come up with at least a realistic estimate. Most investors will want to scrutinize or question your business plan so make sure you have done your homework and you business plan contains as much information as possible.
Overvaluing the business
You may think you have a million dollar idea, but that doesn’t mean you should value your business at a million dollars. If you ask an angel investor for $100,000 for a ten percent share of your business, you will probably find the investor either laughs or walks away. You need to be realistic, while you may think the business has the potential to earn millions, an investor will look at what the business is worth at the moment. If you have few assets and limited sales, your business is not going to be worth very much. A more realistic figure for a start up to offer an investor will be around 50%. While this may sound steep, without investment, your million-dollar idea will essentially be worthless. Furthermore, any investment is a risk to the angel investor, and the potential share should reflect this.
No exit strategy
While your business idea may become your whole life and is all you think about, it won’t be the angel investor’s, and there is a chance he or she doesn’t want to be tied to you and your business forever. Most investors will want you to offer them an exit strategy and a time limit on the investment where they will get their money back and be able to walk away. An angel investor is just that, an investor, they are not your partners so don’t plan on them wanting to stay with you forever. Make sure you have planned for the future, both positively and negatively. You may think things won’t go wrong, but an angel investor probably won’t share the same optimism, so ensure you have a strict time limit as to when you will be able to pay them back.
© 2016 Endeavor Global, Inc.
All Rights Reserved
Endeavor Global, Inc.
900 Broadway, Suite 301
New York, NY 10003
1 (212) 352-3200
Site by #BRITEWEB