12 Ways for Entrepreneurs to understand Angel Investors Better B
BY CYNTHIA KOCIALSKI
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12 Ways for Entrepreneurs to understand Angel Investors Better
Entrepreneurs often seek funding from angel investors, and oftentimes, angel investors banter around terms that are ill-defined or confusing for entrepreneurs. It is simply expected that the entrepreneur knows what the investor means. 1.How much funding do you need? When it comes to angel funding, entrepreneurs are most concerned with how much money an angel group is willing to provide. However, an overlooked point is the total investment needed to make the company viable. For example, an angel may provide $500,000, but always have a limit on the total investment through all funding rounds. 2.What do these company stages mean? Seed stage – This is the stage in which investors will put in a relatively small amount of money to a venture for initial exploratory research or the development of a management team. Seed stage companies by definition have not established any commercial operations.
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Early stage – Companies in this stage are still not commercially viable without continued investment. However, an early stage company is able to begin operations. Pre-Series A and Series A, B, C, and D – These are just other names for seed stage (pre-A), early stage (A), late stage (B, C, D, etc.), development stage and start-up financing rounds. Sometimes, there is a pre-seed round, which may refer to either no outside funding or funding less than $500,000. Usually the angel round is usually the first funding after the founder’s own money. The series rounds are the professional funding rounds after the angel or seed round. The terminology of series comes from successive tranches of preferred stock, so for example, series C preferred stock. Each series of preferred stock has its own specific rights and priorities in relation to the other. Late Stage – Commercial manufacturing and sales are a reality; however, there has been no IPO. The product that the business is backing is available to the public. Companies at this stage have usually been in business for more than three years, but may not show a profit. Development Stage – This level of financing includes both early stage and seed stage financing. It is often used as an accounting term for tax purposes. Start-up – This is the phase of funding that supports the initial marketing campaign as well as product development. Start-up firms will usually have a management team in place with a business plan and some market research. Typically, a business in this stage is showing revenues but is still in the red overall. 3.What is a lifestyle business? A lifestyle business is a venture that is run by its founders with the primary aim of sustaining an income level. This type of business is so named because its first purpose is not limitless profit; rather, it is so that the founders can enjoy a certain lifestyle. Investor have little interest in lifestyle businesses.
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4.What does high growth really mean to investors? What does rapid growth mean? Established definitions of a high growth business quantify the distinction as a company with 10 or more employees that grows by an average of more than 20% for three years in a row. Rapid growth is a term that has been similarly quantified by certain business agencies; however, there is no set definition that separates a rapid growth business from a mid-growth or slow growth business other than the relative growth that business has against others in its industry. Often investors desire $50 million in revenue within 4 years or an excess $20 million in revenue with 5 years. 5.What is a strong management team? A strong management team is a group of highly reputable team members who have experience working in their designated capacities and have a track record of prior success. Investors like to ‘connect the dots’, which means they like to see a career path in marketing versus an engineer suddenly appointed to CFO. 6. What is a breakthrough product? Breakthrough products are usually products that are able to monetize a technological breakthrough that was previously untapped. In the market of agriculture, fructose was an easily produced yet underused product until General Mills commercialized its use in the 1960s. Breakthrough products can usually prove a dramatic improvement in the way something is done. For example, the cotton gin boasted a 50 fold improvement in cotton processing. 7. What is a disruptive or game-changing product? Game-changers are the products that affect all of the other players in the so called “game.” If you had the ability to add a Las Vegas square right next to the Boardwalk square in a Monopoly game with a $4000 rent, then you have effectively changed the entire game. People will begin to change their behavior based on the action that you took.
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9.What defines market traction? Market traction is your ability to prove interest in your product to an investor. Although there is no set way to showcase market traction, as there are many ways in which people can show interest, showing proof of interest to conversion in units of marketing cost to revenue is always a plus. 10. What does a highly scalable business model mean? A business model that is scalable will work when the company is big as well as when it is small. A trucking business may be able to handle normal diesel fuel prices when it is delivering food to local stores. However, the cost of gas will outweigh the profit from delivery over a long distance. This is a business model that is not scalable. Investors like proven business that are ready to scale because it’s perceived as an easy play. 11.What does a defensible competitive advantage mean? A defensible competitive advantage is one that can be sustained in the market over time. Any copyrighted intellectual property is an example of an advantage in the marketplace, but only as long as the company has the money to pay their way through due process. The other consideration is the lifecycle of the product in relation to time to build up a patent portfolio. In most cases, small companies with new products will be going up against larger companies with a much stronger financial position. Small companies must cultivate strong alliances and customer stickiness in order to fight big money.
12.What is a clear exit strategy? From the point of view of an investor, a clear exit strategy allows the investors to realize a return on their investment through a change of ownership. This is accomplished through a merger and acquisition, or a public offering. Most investors aren’t interested in a vague notion of an exit. They want a list of potential acquirers, or a clear strategy to achieve the minimum revenue and growth to take a company public. If a company cannot be sustained over time, at least the company can sell enough product or retain enough savings to pay back investors.
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