Top 11 Things NOT To Tell Angel Investors
Getting angel investors is both much harder, and more important than any time in recent history. Very few venture capitalists are investing in very early-stage companies without some "traction", i.e. real sales. VC financing of product development will only go to "A" teams with "A" plans in large markets. This is les than 1 in 100 ventures. As a result the the quality bar for angel investors is also much higher. Angels also expect a more mature company because they can (and you would too given the choice).
I am not writing this to create a list of things not to say so people can hide the facts, or in any way mislead potential investors. On the contrary I personally believe you must be 100% upfront with any potential investors, and even volunteer your weaknesses to be credible. I am writing this to help entrepreneurs and CEOs design these issues out of their business so they never have to say them. Although there are certainly many exceptions to these, as a general rule there are many good reasons why all of these things should not be part of your company if you are looking for outside investors. I have discussed some of the logic why, but this should not be considered a comprehensive discussion of the reasoning behind each item. You should also realize some of the reasons are a function of perception, or the market. I would never say they all make sense all the time. Each situation is always different.
Most entrepreneurs greatly underestimate the difficultly and time required to get financing. They also underestimate the opportunity cost to their business while they are away focusing on something else. You only want to raise outside capital if you really NEED to have capital to grow. I am recommending to many CEOs I coach and mentor today that, because it is so difficult to raise money today, and valuations are not great, it would be a far superior alternative to spend the same amount of time selling. Or you can add value to your business in other ways. It will generally take six to twelve months of chasing investors to close an angel round. In many cases spending the same amount of time and effort selling your products, or service, could generate nearly as much money, have less risk and not dilute your ownership and subject you to the regulations and covenants that are part of bringing in outside capital. This does not however mean you should not develop a complete business plan. This process will greatly increase your chances of success whether you are raising outside capital or not.
I have not invested my own cash in the business, but have put in lots of sweat equity. Experienced investors know that a start-up is a roller coaster ride of both highs and lows. They want founders to prove their commitment by investing their own money to the point where it will REALLY hurt if they walk away during tough times. Skin in the game is your vote of confidence, so don't expect others to invest if you don't. This does certainly not have to be all your personal net-worth, but it must be a significant portion. You can take out a home equity loan, borrow or withdraw from retirement funds, or just invest personal savings. In the end this will pay off, if you do it right, because it will make you more efficient with capital usage and allow you to bring in investors later, after you have created some value and increased your company valuation. Ultimately if you are successful you will likely own more of the company as a result.
This (or that) market research firm said this market will be a $2 billion market in five years, so all we need is 5% of that market to build a $100 million company. Counter institutively this is basically saying you have NOT done your homework, and do not really know who your customers will be. This is top-down, not bottom-up market research. Besides most of these analysts firms lost huge credibility when the bubble burst and people realized some projected numbers beyond the population of the entire planet for Internet users. You need to describe, if not actually list, the exact customers where you can win in most cases and why using your USP. Research says that 32% of angels site weak market analysis and analysis of the competition as the most critical mistake entrepreneurs make in their business plan. You must design your launch strategy around a particular customer profile and offer something that that customer cannot get elsewhere. Smart investors would prefer an "unfair advantage" in a smaller focused market, because the marketing and selling costs will be lower (concentrated) and the sales close rate higher. This also shows you know what you are out to accomplish and are focused on a smaller market you understand well and can win. This is the "big fish in a small pond thing".
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