Angel funding looks set to increase in 2014—how early-stage startups can best compete for a piece of the pie
Many entrepreneurs dream about a Pinterest- or Uber-like round of funding, maybe even a big exit or IPO like Tumblr and Twitter. However, the reality is that most startups fail. For entrepreneurs preparing to seek financing, insights from experienced founders on how to pitch an investor are plentiful, but insight straight from the investors themselves is rare.
Ryan Sarver, a top Twitter executive turned partner at Redpoint Ventures, recently shared a wildly popular article on what he learned his first month as an investor. One of the most surprising lessons he learned was how little data was available on the companies he was meeting, with which to make the decision whether to invest or not. A recent study commissioned by my company, Worthworm, and conducted by third-party research firm OnePoll, uncovered Angel investors’ outlook for 2014. Surprisingly, it found about 40 percent of Angel investors make just one investment annually; about a third make five or more. That means most investors are only saying “yes” to five or fewer startups out of the hundreds or thousands they’re pitched each year. The good news is the same study showed more than a quarter of the Angel investors surveyed planned to increase the number and the dollar amount of the investments they plan to make in 2014.
If you have one, brief meeting to make a strong impression, it helps to know what the people you are trying to impress are looking for. Here are three tips to help you help investors make the decision to invest in your venture.
Think Like An Investor
The first rule of public speaking is: ‘Know your audience.’ It’s no different when pitching your venture to one or more prospective investors—you are engaging in public speaking. Too often, entrepreneurs emphasize their product or service in a pitch at the expense of discussing other issues of importance to investors—the relevant experience of the management team, the go-to-market strategy, the competitive landscape, likely acquirers that could facilitate an exit event. If you aren’t speaking about issues of importance to investors, you will lose their interest.
Furthermore, in pitching to investors, you should weave a narrative rather than simply state the facts. Think about it—would you rather have someone read the almanac to you or read an exciting, factual account to you? At the end of the day, investors are still people like you and me, and you need to appeal to them on an emotional level as well as an analytical level.
Finally, understand that you have a lot of information to convey in a short amount of time. Decide on the three most important takeaways you want prospective investors to leave your presentation with, and do all that you can to ensure those three messages are burned into the minds of your audience. I like placing an easel at the front of the room, writing the three takeaways on the easel, and mentioning at the outset of my pitch that if my audience remembers nothing else from my presentation, remember these three items.
Pick the Right Markets
Mobile, Internet and healthcare companies will attract the most Angel attention in 2014. For entrepreneurs looking for inspiration, these are the industries to begin taking a look at. What problems need to be solved, how can your idea carve out a niche in one of these areas that warrants attention? The key is to find a sustainable, competitive advantage in your market. Forty-three percent of Angels thought this was the most important factor to consider when deciding to fund a proposal. It may be easy to get investors caught up in a great idea, but it will be difficult to get their wallets caught up too if there is no proof the market will support your venture over time.
The size of the market is also a key consideration. An investor realizes a return when the venture experiences an exit event. The size of that exit event is often directly affected by the size of the market. The smaller the market, the smaller the maximum exit event, and the larger one’s market share must be to command an exit value sufficient to meet the return demands of investors. Consequently, think big, because your investors will. Solutions for larger markets are generally favored over solutions for smaller markets, because in general the former can yield higher exit values with lower market share than the latter.
Realistically Predict Your Financial Performance and Valuation
With non-revenue generating startups like SnapChat receiving multi-billion dollar valuations, it may be tempting to overestimate the value of a great idea. Being realistic, however, is much more likely to promote a constructive conversation about the potential of your company. Half of Angel investors polled said they regretted having made an investment due to financial projections that were overly optimistic or a pre-money valuation that was too high. The latter is particularly important, since a valuation that is too high can turn off investors at the outset.
Most seasoned Angel investors do not consider discounted cash flow (‘DCF’) to be a valid method for valuing an early-stage venture, because you are discounting projected cash flows that are unsupported by historical results. Yet, time-after-time, I see entrepreneurs use DCF. Do your homework, avail yourself of online tools, seek the assistance of your advisors and mentors, and ensure that you walk into an investor meeting or pitch with realistic financial projections and a defensible, credible, valuation. Remember, you can change marketing and management strategies frequently, but once you close a round of funding you aren’t likely to have an opportunity to undo it or renegotiate it. The stakes are high, so don’t leave your projections and valuation to chance.
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Alan Lobock is the co-founder of Worthworm. Having been on both sides of the startup investment scene—seeking investment for his ventures and as an Angel investor himself, Alan launched Worthworm to solve one of the biggest challenges young companies and their prospective investors face—how to compute a credible and defensible PMV for an early-stage venture seeking Angel investment. Prior to Worthworm, Alan co-founded SkyMall, the company whose shopping catalog is found in the seat-back pockets of most U.S. commercial aircraft. He served as the company’s CFO and executive vice president, marketing, before pursuing numerous other entrepreneurial opportunities in which he participated in raising millions of dollars of Angel and VC funding.