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How To Approach Venture Capitalists And Angel Investors

In many ways, venture capitalists and angel investors seem like the perfect solution to capital woes for startups and SMEs—but how do you go about looking for the right VCs or investors for your business? It’s not quite as easy as showing up at an office tower with your proposal in hand, hoping for a run of good luck or blind faith. Instead, read on to learn about the process of approaching venture capitalists and angel investors, what documents you should have on hand, and how to be prepared for your big pitch.

What Investors Should You Be Seeking?

Your startup or small business may have been able to get off the ground by using your own savings or funding from friends and family, but now it’s time to go bigger. Targeting venture capitalists and angel investors is a likely next step, although it’s one that shouldn’t be taken lightly—after all, it’s your company that’s at stake, and you want to take angel investor or VC funding very seriously.

First, take some time to really consider the potential future of your business. Do the VCs you’re pitching to align with the values of your company? If they agree to give you funding, you’ll be giving up part of your ownership—is this a move you’re willing to take? If the answer to either is no, you may be better off searching for alternative methods to raise the capital you need. Owners that prefer to have hands-on control over their companies may not mesh well with outside investors down the road, particularly if the business ultimately fails to recoup the investment.

Next, you’ll want to look at the difference between venture capitalists and angel investors in order to decide which one you’ll want to approach. Venture capitalists are finance-driven and focused mainly on tech industries, and, according to an article at Huffington Post, look for at least 30% returns per year over the life of their funds. “VCs like to see the value of exit to be two to four times sales and most VCs will not consider an investment unless the potential exit price is $200M – $300M or more,” according to the article’s author.

In an article by the Kauffman Foundation, they make the point to “find the kind of venture capital firm that aligns with [your] current business needs in terms of type, size and stage of development” and to “research VC firms to make sure they have a reputation for hanging in there and helping businesses work through problems.” Although you ought to make your investors aware of any business risks up front—and they’ll definitely ask if you don’t—it’s reassuring to know that your VC believes in you and won’t bolt at the first sign of possible trouble.

Conversely, angel investors “generally aim to take a 20 to 50 percent ownership stake and they like to build a portfolio of projects where they typically realize about 85 percent of their total portfolio returns from 15 percent of their portfolio companies,” says the Huffington Post, “since most of them are investing in extremely risky seed stage/series A financing round.” Indeed, it can be tricky for startups to gain backing from angel investors right off the bat, and the article goes on to note that 90% of brand new startups fail to raise their first round (series A) of capital, while only 50% of more developed startups failed to raise the second round (series B financing) of capital.

But although this post from American Express’s Open Forum blog echoes the above in stating that more investors are likely to back “later-stage ventures,” it’s still a very positive time to flex entrepreneurial muscle. “Today’s early-stage investors are eager to place frequent bets even on very young and speculative enterprises. Structure Capital, for instance, has made 82 investments in a little over a year,” notes the blog post, before mentioning that hedge fund and mutual fund investors are also getting into the backing game. There’s never been a better time to take your shot—as long as you’re prepared.

How You Should Make Your Approach

It can be rare to get a meeting with a VC or angel investor through cold calling, and it’s much more likely that mining your personal network of connections will be more successful. If you manage to get an appointment, you shouldn’t go in empty-handed. Come equipped with a good executive summary or a slide deck that clearly displays your business, what it can offer the investor, and what they need to know in a nutshell. This presentation ought to cover your company’s current market, what the industry looks like, what the competition is like (and how they’re faring), and especially your value proposition. It’s important to have market projections on hand, but also put an emphasis on clear facts and confident business plans.

Additionally, the Kauffman article recommends that owners be ready to brainstorm, and be quick on their feet when it comes to addressing possible business challenges that the VCs might bring up. As mentioned earlier, they’ll definitely want to know about any risk factors that may arise.

Also, it’s recommended that you have a properly drafted PPM to provide to your investors—one that contains all the information about your company that VCs or angel investors would need, including your plan of operations, marketing & sales plan, management profiles, and more. A PPM also acts as a legal document, outlining the details of the stock or shares that the investor will receive, as well as plainly-stated risk factors. Another useful document to have on hand is a subscription agreement (usually included with a PPM), which is a contract that provides the exact terms of the investment as well as representations about the suitability of the investor making the investment. This can help cover even more of your bases when it comes to choosing the right investor for your business.

At the end of the day, both venture capitalists and angel investors primarily care about two things: making sure their investment will gain returns, and that any potential risks are mitigated. If you can provide concrete plans to reassure investors on both points, then you’re already ahead of the game.

Ready Your Approach

When you’ve got a startup or a small business that’s in need of capital, looking to either venture capitalists or angel investors can be a valuable proposition—but only if you go about it the right way. If you ensure that you’re prepared and have all your bases covered with facts, projections, and the proper documentation, you’ll be much more likely to ease the mind of even the most prudent investors.

What has your experience with VCs been like? Tell us about it in the comments.

About The Author
Erik P. Weingold
Erik P. Weingold
Erik P. Weingold is an entrepreneur and corporate securities lawyer with over 20 years experience under his belt. He has been practicing law since 1995, and since 1998 has been drafting PPMs that have been used to raise millions upon millions of dollars for startup companies and small businesses throughout the U.S. Erik is the founder and General Counsel to PPM LAWYERS.