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What Every Angel Investor Wants You to Know: An Insider reveals how to get Smart Funding for your Billion-dollar Ddea, by Brian S Cohen and John Kador
ASK any South African business person to identify the biggest threats to the economy. You are sure to get the following at or near the top of the list: unemployment.
Cohen’s informative book starts with the premise that “startups are good for society, and they need angel investors to help them get started and build a strong foundation”. Every large business began as a start-up, and the challenge is to assist start-ups to grow fast and become huge.
The book is relevant to the many people who approach investors of all types, but especially so for those who approach ‘angel investors’ to invest in their start-ups.
Cohen bases his approach to investing as an equal relationship between the start-up and its investor. Most angels are former successful businesspeople who wish to give back to others, most often to the next generation of business people.
Angel investors may be expected to provide insight and wisdom. Founders manage the business daily and have to rely on their own best judgement, informed by the best advice they can find.
Angels need start-ups, and start-ups need angels. Angels are not charities who make funds available to the deserving; they are making an investment, not a loan nor a donation. They are businessmen who usually invest in a portfolio of start-ups with the intention that one will be the next Google, which will cover the cost of all the others that either lost money or merely broke even.
Many founders believe that if they only had access to sufficient money, they would be able to be successful. That is wishful thinking. Founders need two things from investors – money and wise help. That is what the best angels add – their wealth of experience in business and their contacts.
In the world of investment this is called Smart Money, to distinguish it from Dumb Money, which is an exchange for equity in your business, and no more.
Business is far too complicated and multi-faceted to have all its problems solved by a large investment. Business is a never-ending series of decisions, many of which seem innocuous only to turn out to be superb or disastrous with time. In the book I reviewed last week, I described the dilemmas that founders face, none of which have obvious answers.
READ: Sound start-up advice
Help could be at hand if you find the right angel for you and your start-up, and this may well assist you to make correct decisions.
Cohen describes the intention of his book as “a guide to bring entrepreneurs and angels investors together for their mutual benefit and the benefit of the community”. All angels have chosen this path because they want a financial return, the best of them “because they sincerely want to help entrepreneurs”.
The four things angels look for
Cohen describes four attributes angels look for in the presentation of the start-up for it to be fundable.
First, the business must have the capacity for growth. Built into the business model must be an ability to keep growing. Starting a business to cater to the mass of soccer fans who came to South Africa for the Soccer World Cup may have made money, but will it continue to grow after the games? The capacity for growth must be part of the business itself.
Second, the business must have scalability. The ideal of a scalable business is one where the costs of serving 100 customers or 100 000 customers are essentially the same. A hairdresser can service only a fixed number of clients each day, and there is little change of technology changing that fact. Hairdressing is an example of a non-scalable business. Clearly between these two extreme lies a wide range of businesses.
Third, the presentation must show that the business has been or can be profitable. That means, plain and simple, that revenues must exceed operating costs.
The fourth requirement is for a business to be fundable is that it is sustainable. In this context, sustainable means profitability will be ongoing and that the business will be able to mutate to meet new circumstances.
With the relationship between the angel and the founder being symbiotic, it is essential the founder shows his or her character early. The angel needs to trust the founder based on evidence of achievement, not a slick presentation.
All businesses have to be led, and the quality of the leader will either scare the angel off or give them confidence. If the founder (or founders) have led a successful business, that gives confidence. If not, their success at founding and managing a volunteer-led weekend sports coaching school is evidence of leadership and execution ability, if not business smarts.
All angels will do a due diligence before finally committing to your start-up. If anything you present as fact cannot be proven, it could raise just enough doubt to send the angel flying away.
“Success with angel investors requires more than just a great idea. It requires creating an emotional hugging relationship,” Cohen notes.
Angels choose their founders, and founders need to choose their angels thoughtfully. Founders need to do their due diligence on the angel. Angels are high-profile people, known to many and with many of their achievements publically available, making the process that much easier.
Investment is a relationship that must work for both parties. As a relationship, it needs to be based on mutual trust and mutual respect.
There is much in this book that will help founders give the best impression of themselves and their business. It will also help them attract the best angels into lucrative business relationship.
Readability: Light -+--- Serious
Insights: High -+--- Low
Practical: High +---- Low
*Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Strategy that Works. Views expressed are his own.
