Angel investors are busy. They tend to have a lot of irons in the fire, and asking them to drop everything to get on your deal will most likely be a dealbreaker. Angel investors want to make sure that they have the right team of fellow investors in place, and that takes time. "I would much rather bring in my colleagues who may also want to invest," says Barbara Clarke, social entrepreneur and angel investor with Astia, on whose board I sit. "It's good for the startup, and it's good for me."
Clarke takes on her investments as any good economist would: with an eye toward the big picture and the outcomes that can and should result from the interaction of deal term sheet components. You need to understand these components before you decide to approach any angel investor.
Here are five insider tips Clarke shares that are sure to get an angel in your corner and raise the investment you need:
1. Be creative with your term sheet.
A term sheet is your opportunity to disclose what your business is about and what you need and want in a partnership with an investor. Make sure it is unique. Over the course of many years of counseling entrepreneurs, I have seen my fair share of term sheets. Sometimes I feel as if there are few distinctions from one founding team's term sheet to another. How do angels tell the difference? "I think sometimes startups think, 'Oh, I'll just take what I've seen my friends do and use that to build my own agreement,'" says Clarke. Chances are what happened with your friend's company is not what should happen with yours.
Angels want to make sure they are protected. They will scrutinize your term sheet to ensure that you are who you say you are, that your company is what you say it is, that you own the legal rights to IP and the ability to use that IP as stated in your business plan. Keep the basic components of a term sheet, but don't assume that another firm’s terms are right for you.
2. Include all the numbers.
There is more to a term sheet than meets the eye. "As an economist, the way I view a term sheet is like an equation where you have variables including an interest rate variable, a discount variable, and you have a time variable, and I really feel like nobody has looked at how those things work together," says Clarke. Take the time to figure out how these variables work together. Clarke suggests running various scenarios that take the impact of discount on interest rate, of interest rate on discount, and each scenario in given time periods. Don't rely just on round numbers. Give some thought to economic terms that make sense for you and make sense for your potential investors.
3. Do scenario planning.
Numbers are important, but angel investors will also be looking to you to acknowledge how you cover the things that can go wrong. "I look for information such as, is there a board position, how am I informed about what’s going on going forward, and what information is disclosed," says Clarke. And make sure to spell out what is property of your business and what are your personal assets.
Make sure you think through multiple scenarios. For example, what if your startup is acquired sooner rather than later, before investment is converted? Will your investors get a multiple of their money, or will they be able to convert prior to sale? Think through these options, even if far reaching, and spell it out. And be sure to follow up on any unanswered questions; it’s a great way to establish a relationship.
4. Understand that angel investing is a team sport.
Angel investors tend to be a cross-section of domain and industry expertise. When they are reviewing potential group investments, each angel brings a specific set of questions and perspectives to the table. "The best startups take advantage of the multiplier effect," says Clarke. Though an individual angel's investment is not substantial in the broader scope of a startup's angel investment, the founding team should consider the perspectives that each angel may bring to the table, account for those interests in the term sheet, and take advantage of that expertise as the founder is building out the agreement.
For example, an economist investor like Clarke will focus on the numbers and the interactions between different financial scenarios, while an investor with a legal background may be focused on what is and is not included in the declarations included in the term sheet. Having seen interactions between angel groups, I can assure you that each investor relies on the expertise and input from other investors to cover personal blind spots. If something is missed or misrepresented in your term sheet, it will be disclosed through the angel investor group's dialogue about the opportunity you are presenting to it.
5. Do not rush the decision-making process.
Although it is important to keep momentum in your fundraising round, angel investors are not going to rush on the basis of an unfounded urgency. "I am personally turned off by deals that have this false sense of urgency," says Clarke. "For first-timers, who expect to close their deal really quickly, to expect that an angel drop everything to jump on a deal is not realistic."
Given the wealth of deal flow, your desire to rush matters may be the reason an investor needs to pass on your deal. Educate yourself on how long it takes to fundraise, and plan your timing and deadline accordingly.
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