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Angel Investor Funding Formula

Hosted by Dave Lavinsky

In this training, you’re going to learn, via 6 video modules, how

to raise money from angel investors.

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The Six Modules

• MODULE 1: Who Angels Investors Are

• MODULE 2: Legal Issues When Raising Angel Funding

• MODULE 3: How to Find Angel Investors

• MODULE 4: How to Contact Angel Investors

• MODULE 5: How to Present to Angels Like a Pro

• MODULE 6: How to Close the Deal

MODULE 1:Who Angel Investors Are

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Who are Angel Investors?

• Private investors who offer financial backing to an entrepreneurial venture

• The average angel investor:

– Is 47 years old

– Has an annual income of $90,000

– Has a net worth of $750,000

– Is college educated

– Has been self employed

– Invests $37,000 per venture

Angel Statistics

• Angels funded 57,225 entrepreneurial ventures last year

• Total investments were $17.6 billion

• 259,480 individual angels participated (vast majority are “latent”)

• About 200 angel groups in US

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Latent Angels

• Most angels don’t know they are angels (I refer to them as “latent angels”)

– According to Spectrem Group (figures exclude value of primary residences)

• 980,000 US households with net worth > $5 million

• 7.8 million US households with net worth > $1 million

• 12.7 million US households with net worth > $500K

Latent Angels

– Latent angels have the means, ability and potential interest in investing, but don’t necessarily know about opportunities

– Latent angels typically invest in the stock market, which has yielded negative returns over the past decade (so they are more open to new investment opportunities)

– Latent angels less competitive than angel groups and “super angels” (<100 in US) as they see few to no deals

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Why Angels Invest?

1. ROI

2. Know/like the entrepreneur

3. Feel they can add value

4. Likes the action

5. Ego

Where do Angels Invest?

• All geographies; but close to home

– 70% of angel investments made within 50 miles of angel’s home or office

• Sectors

– Software: 19%

– Healthcare: 17%

– Industrial/Energy: 17%

– Retail: 9%

– Biotech: 8%

– Financial Services: 5%

– Other: 25%

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MODULE 2:Legal Issues When

Raising Angel Funding

Legal Issues Overview

• We will discuss:

– Why there are legal issues

– The key Regulation D rules

– What you can and cannot do

– Using a PPM

• Disclaimer – I am not an attorney; you are encouraged to use an attorney when raising money

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Why There Are Legal Issues

• When you raise funding from angel investors in the United States, you are selling securities (either equity or debt)

• The sale of securities is governed by the US Securities and Exchange Commission (SEC)

• Penalties for not complying with SEC and state government rules could include fines and even jail time

Regulation D

• Regulation D is a series of Rules that provide certain exemptions from the Federal Securities Act of 1933 so that you can sell your company’s securities, stock or debt to the public without registration with the SEC

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Regulation D – Key Rules

• Rule 504: raise up to $1 million in a 12 month period

• Rule 505: raise up to $5 million in a 12 month period

• Rule 506: raise an unlimited amount of money in a 12 month period

Regulation D – Key Rules

• Rules 505 and 506 require more disclosures to investors (e.g., risk factors, restricted stock -securities cannot be sold for six months or longer without registering them)

• Rules 505 and 506 limited to 35 non-accredited investors (unlimited accredited investors); with 506, even non- accredited investors must be sophisticated

• Accredited:

– Net worth (excluding primary residence) > $1 million

– Annual income > $200K (or $300K with spouse)

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Regulation D Filings

• You need to file Form D after you first sell your securities

• http://www.sec.gov/about/forms/formd.pdf

• Some states have certain “blue sky” laws and forms you need to fill out, so ask your attorney what they are or find them on your state’s website (North American Securities Administrators Association http://www.nasaa.org)

What You Can & Cannot Do

• You cannot do mass advertising; you may NOT advertise, market or otherwise PUBLICLY solicit the sale the securities

• Before pitching, you must be able to demonstrate and document a "substantial and pre-existing relationship" between yourself and each prospective investor

– Rules are vague; general strategy is to get folks interested in learning more about your company first, and then about investment opportunities

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What Is a PPM?

• Private placement memorandum or PPM includes:

– Business plan

– Legal wrapper (risks/disclosures, stock ownership, etc.)

– Deal terms

– Subscription agreement

Why Use a PPM?

• You don’t have to use a PPM

• The PPM gives the company and its management team liability protection against lawsuits from shareholders as they relate to improper disclosures

• However, a PPM does not protect you from fraud, which is typically in the form of material omissions or mis/false statements

– Fraud can result in jail time

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Deal Terms

• You control how you structure the transaction

– Whether you are giving the angel investor debt or equity (or convertible note)

– The share price, etc.

• Make sure the investor is getting value, or they won’t buy

– Typically get “preferred” shares (which can include liquidation preference & cumulative dividends)

MODULE 3:How to Find Angel Investors

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Finding Angel Groups

• Go to Angel Capital Association directory at http://www.angelcapitalassociation.org/directory/

– Listing by US region, and Canada and Mexico

• Contact angel group via their website, or contact individual member

– Search “member [angel group name]”

– Ideally network to them

Angel Groups Are Highly Competitive & Sometimes Cost Money to Apply

• According to AngelSoft only 2.6% of deals get funded

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If Going after Angel Group With Fees

• Find individual member of group

• Contact them

• Make sure they are a strong proponent

– If not, not worth paying the fees to apply

Finding Individual Angels

1. Advisors

2. Affinity Groups

3. Referrals

4. Networking

5. Focused Prospecting

6. Unfocused Prospecting

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1. Advisors

• Why you need advisors:

– Practice

– Connections to funding

– Credibility

– Operational success

1. Advisors

• Getting advisors:

– Create big list of people you respect and admire (shoot high but not too high)

– Request an INFORMATIONAL MEETING

• You respect what they’ve accomplished and would like to meet to tell them about your business and get their advice

• SCORE has free service

– If you like them and have good rapport, ask them to become an Advisor

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1. Advisors

Dear [Name],

I am the founder of a new company called XYZ Company.

Based on your success as [fill in what they have done], I was hoping to sit down with you for a few minutes to ask you some questions about my venture and get your thoughts.

Could you meet for a few minutes on [insert date]? We could meetat [place] where I’d be happy to buy you a cup of coffee while we speak if it’s more convenient.

Please let me know if this time/place works for you.

Regards,

[Your Name]

1. Advisors

• Goal:

– Advisory Board with 3-8 members

– Once you get 1st, rest is much easier

• Requirement & Compensation

– Quarterly 1 hour meetings

– Options to purchase 0.5% of company vesting equally over 5 years

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1. Advisors

• Raising Money:

– At first (or subsequent) advisory board meetings, explain the top priority is raising funding

• Who do you know who might be interested in investing?

• Are you interested in investing?

2. Affinity Groups

• Virtually every product/service has an affinity group

– Doctors, bird watchers, surfers, etc.

• Get involved in the affinity network (online and offline) – become a trusted and valued member of the community:

– LinkedIn groups

– Facebook groups

– Forums and social networks

– Industry events

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2. Affinity Groups

• Once ties are built, ask for support:

– Cash now, via:

• Investment (I’m raising money for my new business; if you would like to learn more about what I’m doing, do this…)

• Pre-sales of products/services

– Non-cash support. Willingness to:

• Promote you to others (including customers and/or investors)

• Distribute your product/service

• Agree to become a future customer (or advisor)

3. Referrals to Angels

• Who do your advisors know?

• Who do your affinity member contacts know?

• Who do you know from work?

• Who do you know that might be in an organization with you?

• Who does your lawyer or accountant know? ***

• Who do your best friends know?

• Who does your family know?

• Who do your relatives know?

• Who do you know from local stores and restaurants?

• Who do you know online via LinkedIn and Facebook?

• Whose business cards do you already have?

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4. Networking

• Alumni events

• Industry events

• Chamber of Commerce events

• LinkedIn & Facebook

5. Focused Prospecting

• Current & retired executives

– E.g., Google searches on “retired Boeing executive” and “former Boeing executive”

• Business owners

• Who do you respect in your industry?

• Who has achieved what you want to achieve?

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6. Unfocused Prospecting

• Purchasing lists of target investors

• Can easily buy lists of:

– Business owners

– Executives

– Millionaires

– Accredited investors

• Should still focus geographically (within 50 miles)

MODULE 4:How to Contact Angel Investors

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Contacting Angels

• 3 types of meetings to have

– One-on-one meeting

– Event/group meeting

– Webinar

• 2 types of invites/meeting content

– Information/learn more

– Investment focused

3 Types of Meetings

• One-on-one meeting

– You/your team and one prospective investor

• Event/group meeting

– You/your team and many prospective investors

– Pro: social proof (might wait until have existing investors); efficiency

– Con: cost (if not at your office)

• Webinar

– If qualified investors but far geographically

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2 Types of Invites/Meeting Content

• Information/learn more (colder leads)

– Advisors

– Affinity Groups

– Focused Prospecting

– Unfocused Prospecting

• Investment focused (warmer leads)

– Referrals

– Networking

Information Focused Contact

• Call/Email:

• If relevant: I am contacting you because (e.g., as an executive at IBM I think you will be really interested in what I’m doing…)

• I am the founder of ABC company in [location]. We are a new [type of company] that is poised for significant growth. I’d like to tell you more about what we’re doing and how you might be able to get involved.

• Are you available to speak on [time 1] or [time 2] or can you suggest another time that better fits your schedule.

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Investment Focused Contact

• Call/Email:

• Recently we met at XYZ event/I was referred to you by John Smith.

• I am the founder of ABC company in [location]. We are a new [type of company] that is poised for significant growth. We are currently closing a round of funding from individual investors and would like to set up a time to show you what we are doing.

• Are you available to speak on [time 1] or [time 2] or can you suggest another time that better fits your schedule.

Ongoing Referrals

• Always try to get prospective angels to refer you to more angels (at the appropriate time)

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A. Presentation Basics: Anatomy of a Great Presentation

MODULE 5: Presenting to Angels Like a Pro

Understand Your Audience

• Who are you presenting to?

• How sophisticated are they?

• What are THEIR needs?

• What are THEIR goals?

• Are they viewing you with skepticism?

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Grab Their Attention

• Need to start with a hook – could be a story or interesting fact

• Your opening statements should be memorized

• Excite them about what’s coming next - in the next 20 minutes, you will….

Don’t Overwhelm

• “We speak to be remembered and repeated”

• Less is often more when it comes to data

• What are the key points that you want your audience to remember

• Don’t use $10 words

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Use, Don’t Abuse PowerPoint

• PowerPoint is a visual aid, not a teleprompter

• Don’t use too much text

– 6 X 6 rule

– 10/20/30 investor PowerPoint rule

• Get your audience to visualize what you are saying

Tell Stories

• Facts don’t inspire; stories do.

• “People just aren’t that good at remembering facts. When people do remember facts, it’s almost always in context.” – Seth Godin

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End Powerfully

• “Last words linger”

• Tell inspirational story of realizing vision

• Reiterate the key exciting points

• Ask for the next step

• Memorize your ending

B: Acting the Part:What You Need to Do

As the Presenter

MODULE 5: Presenting to Angels Like a Pro

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Angel Investors

generally invest in

the jockey and

not the horse

Build Trust & Likeability

1. Commonalities

2. Appearance

3. Rapport

4. Referrals/Just-mets

5. Authority

6. Evidence

7. Experience

8. Passion

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1. Commonalities

• What do you have in common with the investor/lender?

– Running?

– Kids?

2. Appearance

• Look the part

– Rarely go wrong with suit and tie, but may not fit the part

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3. Rapport

• People more easily trust those who they like

• Likeability ties in directly with commonalities; we trust those who are similar to us

• Build rapport to build likeability

– Understand and celebrate their “aliveness”

4. Referrals/Just-mets

• Referrals to investors automatically breeds trust and likeability

• Referrals AFTER meetings solidifies trust

• Waiters and secretaries can kill deals

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5. Authority

• People trust authority

• People listen more carefully and trust more quickly when information comes from a source they perceive to be authoritative

• Show how you are an authority

6. Evidence

• Information which is corroborated by outside parties -- research, customers, and firsthand knowledge (best) -- is immediately accepted by the audience

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7. Experience

• Experience personalizes evidence, and adds additional authority

• Having “been there, done that” breeds great credibility and trust

8. Passion

• Passion influences others

• It stimulates their minds, and their hearts, building trust and likeability

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C. Creating Your Presentation

MODULE 5: Presenting to Angels Like a Pro

10-Part Investor Presentation Outline

1. Vision

2. Summary

3. Market Pain

4. Solution

5. Competition

6. Marketing & Sales Plan

7. Team

8. Milestones

9. Financial projections/needs

10.Conclusion

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SLIDE 0:

COVER SLIDE

• Include contact info

– Name

– Email

– Phone

– Website

Company Name

Joe SmithCEO

joesmith@joescompany.com555-555-5555

www.joescompany.com

LOGO

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SLIDE 1:

VISION(and Attention Grabber)

Did you know that by 2030, there will be 71.5 million Americans over the age of 65, which is more than double the current number… yet still no company has figured out how to ….. Well, today, I’m going to show you a world in which this problem is solved once and for all….

Have you ever waited in a long line at a grocery store? And gotten pretty frustrated. Well, our vision is to make sure this never happens again. And in the next 20 minutes, I’m going to show you how we’re going to achieve this.

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SLIDE 2:

SUMMARY

• Elevator Pitch

– What company does

– Key pain solved

– Company status

– Why exciting/unique success factors

Summary

• Acme Corp offers….

• We solve the problem of….

• We launched on [date], and since then, we have ….

• Unique success factor 1

• Unique success factor 2

• Unique success factor 3

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SLIDE 3:

MARKET PAIN

• Why does the market need you/what is the problem?

• For whom is it a problem?

• How big is the pain?

Market Pain

• 465,000 new moms each month

• Only 12% have time to XYZ

• Only current solution costs $Z, which 90% of new moms can’t afford

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SLIDE 4:

SOLUTION

• How do you solve the pain?

– Show/describe your product or service

Solution

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SLIDE 5:

COMPETITION

• How are customers currently solving their pain?

• What are your competitive advantages?

Competition

• XYZ company offers this

• ABC company offers that

• Why we will beat them:

– Reason 1

– Reason 2

– Reason 3

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SLIDE 6:

MARKETING & SALES PLAN

• What is your plan to acquire customers?

• How long is your sales cycle?

Marketing & Sales Plan

• Working with these distributors

• Have these partners

• Will run this campaign

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SLIDE 7:

TEAM

• Who are the key members of your team?

• What are their credentials/ past accomplishments?

Team

• Joe Smith, CEO

– Former owner of ABC company

• Ralph Jones, COO

– Former VP at ABC company

• Mary Thompson, CMO

– Former Director at Acme company

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SLIDE 8:

MILESTONES

• What are the upcoming milestones that your company will accomplish?

• What is the timeline?

Milestones

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SLIDE 9:

FINANCIAL PROJECTIONS/NEEDS

• How much money do you need to achieve your milestones? And when?

• What are your financial projections?

• Will you need more money & why? (if applicable)

Financial Projections

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

Yr 1 / Q1 Yr 1 / Q2 Yr 1 / Q3 Yr 1 / Q4 Yr 2 / Q1 Yr 2 / Q2 Yr 2 / Q3 Yr 2 / Q4 Yr 3 / Q1 Yr 3 / Q2 Yr 3 / Q3 Yr 3 / Q4

Total Revenues Net Profit

Need $X Need $Y Need $Z

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SLIDE 10:

CONCLUSION

• Reiterate vision / tell inspirational story

• Reiterate key points & “unique success factors”

Conclusion

• We are position to….

• Unique success factor 1

• Unique success factor 2

• Unique success factor 3

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D. Advanced Presentation Tips

MODULE 5: Presenting to Angels Like a Pro

1. Make it look nice

• No typos

• Visually appealing

• Color print copy if meeting with angel investors

• PDF version to email after meeting

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2. Iterate

• When were investors nodding?

• When did they look unengaged?

• What questions keep coming up?

• Look and listen for feedback, and iterate

3. Be flexible

• Sometimes questions come at end; sometimes during presentation

• Be flexible; he who has the gold, makes the rules

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4. Use custom animation

• Pop up one key point at a time

• Remember your PowerPoint is a visual aid; you want the audience to look at you

5. Show confidence

• Eye contact

• Handshake

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6. Rehearsal

• Rehearse your slides so you don’t need to look at them for more than a split second

• Do mental rehearsal

7. Do Mock Presentations

• Try your presentation on a “warm” audience first

• The more times you do the presentation, the more comfortable you’ll get

• But…give every presentation like it’s your first; don’t lose your enthusiasm

– Stories helps with this

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8. Have back-up slides

• To answer questions that may come up.

• If question comes up most of the time, put it in main presentation

9. Follow-Up

• Email presentation

• Ask for next step

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10. Virtual Presentations

• Interact more by posing questions for audience

MODULE 6:

How to Close The Deal

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How to Close The Deal

• Preparing for Due Diligence

• Angel Follow-Up Strategies

• 11 Closing Techniques

• Budgeting Time for Raising Angel Funding

• What To Do After You Raise Your Angel Round

Preparing for Due Diligence

• Deep analysis of the investment opportunity

• Prepare as much as possible beforehand

• Note: many angel investors will not request it

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Preparing for Due Diligence

• Key due diligence items

– Audited and unaudited financials

– All legal and technical documents: leases, employee agreements, purchase or sale agreements, patents, etc.

Angel Follow-Up Strategies

• Maintain detailed prospective angel spreadsheet

– Include contact info and status of each

• “Reply” to unanswered emails

• Send brief thank you emails after meetings

• Keep angels informed of your progress

• Persistence is good…to a point

• Get referrals

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11 Closing Techniques

• At end of PowerPoint presentation, explain investment opportunity

• Close could come in that meeting or in subsequent meeting (face-to-face) or phone

11 Closing Techniques

• 2 Core Types of Techniques

– General closing techniques that apply to raising angel investments (9)

– “Why now” closing techniques that cover the last yard (2)

• Remember!!!!

– Must be truthful

– If angel feels like they’re being tricked, they won’t invest

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General Closing Techniques

• Get them to say YES a lot

– So, do you like our product? Do you like what we’re doing? Do you see how the market is moving in the right direction? Etc.

• Assumptive Close

– Act as if they already said yes to investing.

– E.g., at our shareholder meetings you will be able to; once you become a shareholder, you…

General Closing Techniques

• Flatter them (if they show knowledge)

– Wow, you really know about this market. As an investor, we can leverage your expertise.

– Make them feel they can add value and play to their egos.

• Value close

– Plays to ROI need. Can’t promise returns, but money in stock market isn’t doing anything and real ROI potential here.

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General Closing Techniques

• Close on Emotions

– How will you feel when we become next Google, or you are sitting in “your” restaurant

• Exclusivity

– As you may know, we are not making this investment opportunity to everyone….

General Closing Techniques

• Social Proof/Intelligence

– One of our recent investors is a doctor/lawyer who…

• Hassle-Free Close

– I’ve already took care of filling out the Subscription Agreement for you…

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General Closing Techniques

• Doing Well By Doing Good Close

– By helping our company succeed, you will also be making these positive impacts (more jobs, improving local economy, etc.)

“Why Now” Closing Techniques

• Scarcity

– Round is closing soon (round will be closing). Expect it to be over-subscribed. Cannot guarantee their place

• Loss of opportunity or value

– Expect valuation to be much higher in next round

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Budgeting Time for Raising Angel Funding

• Ideally budget 6-9 months for the process

• Key stages of capital-raising process:

1. Create investor communications materials (business plan or PPM, investor presentation)

2. Develop targeted Advisors list and securing, getting involved in affinity groups, getting referrals, networking, prospect lists

3. Contact and presenting to angel prospects

4. Closing the transaction

What To Do After You Raise Your Angel Round

• Always look towards next round of funding

• Possibly hire CFO upon funding

• Keys to next round - execute on plan; show continued growth

• Keep up networking efforts, and keep investors apprised of your growth

• Meet with new investors well before you need capital

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Congratulations!

• You have completed our Angel Investor Funding Formula program. Simply follow the steps and you will be in a position to raise all the money you need to grow your company!

Good luck!!!